MARY THE QUEEN COLLEGE (P)

Institute of Business Education

Guagua, Pampanga

Operations Management and TQM

JESSIE D. MANAPSAL, Ph.D.

Professor
 Forecasting C3

• Forecasts are a basic input in the decision processes of operations

management because they provide information on future demand. The
importance of forecasting to operations management cannot be
overstated. The primary goal of operations management is to match
supply to demand. Having a forecast of demand essential for determining
how much capacity or supply will be needed to meet demand.
• Business make plans for future operations based on anticipated future
demand. Anticipated demand derived from two possible sources:
• 1. Actual customer orders
• 2. Forecast
• Two aspects of forecasts are important:
• 1. Expected level of demand
• 2. The degree of accuracy that can be assigned to a forecast

• Forecast are made with reference to specific horizon. The time horizon may
be fairly short, or somewhat longer.
• Short term forecasts pertain to ongoing operations. Long range forecasts can
be an important strategic planning tool.

• Forecast are the basis for:

• 1. Budgeting
• 2. Planning capacity
• 3. Sales
• 4. Production and inventory
• 5. Personnel
• 6. Purchasing

• Uses of forecasts in business organizations:

• 1. Accounting. New product/process costs estimates, profit projections,
cash management.
• 2. Finance. Equipment/equipment replacement needs, timing and amount of
funding/borrowing needs.
• 3.Human resources. Hiring activities, including recruitment, interviewing,
and training, lay off planning, including outplacement counseling.
• 4. Marketing. Pricing and promotion, e-business strategies, global
competition strategies.
• 5. MIS. New/revised information systems, Internet services
• 6. Operations. Schedules, capacity planning, work assignments and
workload, inventory planning, make or buy decisions, outsourcing, project
management.
• 7. Product/service design. Revision of current features, design of new
products or services.
• Elements of a good forecast
• 1. Timely. Usually, a certain amount of time is needed to respond to the
information contained in a forecast.
• 2. Accurate. The degree of accuracy should be stated. This will enable users
to plan for possible errors and will provide for the basis for comparing
alternative forecast.
• 3. Reliable. It should work consistently. A technique that sometimes provides
a good forecast and sometimes a poor one will leave users with the uneasy
feeling that they may get burned every time a new forecast is issued.
• 4. Meaningful units. Financial planners need to know how many dollars will
be needed, production planners need to know how many units will be
needed, and schedulers need to know what machines and skills will be
required.
• 5. In writing. Although this will not guarantee that all concerned are using
the same information, it will at least increase the likelihood of it. In addition,
a written forecast will permit an objective basis for evaluating the forecast
once actual results are in.
• 6. Simple to understand and use. Users often lack the confidence in
forecasts based on sophisticated techniques, they do not understand
either the circumstances in which the techniques are appropriate or the
limitations of the techniques.
• 7. Cost effective. The benefits should outweigh the cost.
• Forecasting and the supply chain
• Accurate forecast are very important for the supply chain. Inaccurate
forecasts can lead to shortages and excesses throughout the supply chain.
Shortages of materials, parts, and services can lead to missed deliveries,
work disruption, and poor customer service.
• Organizations can reduce the likelihood of such occurrences in a
number of ways:
• 1. Striving to develop the best possible forecasts
• 2. Collaborative planning and forecasting with major supply chain partners
• 3. Information sharing among partners and perhaps increasing supply
chain visibility by allowing supply chain partners to have real time access
to sales and inventory information.
• Steps in the forecasting process
• 1. Determine the purpose of the forecast. How it will be used and when it will
be needed? This step will provide an indication of the level of detail required
in the forecast.
• 2.Establish a time horizon. The forecast must indicate a time interval,
keeping in mind that accuracy decreases as the time horizon increases.
• 3. Obtain, clean, and analyze appropriate data. Obtaining the data can
involve significant effort. Once obtained, the data may need to the cleaned to
get rid of outliers and obviously incorrect data before analysis.
• 4. Select a forecasting technique
• 5. Make the forecast
• 6. Monitor the forecast errors. The forecast errors should be monitored to
determine if the forecast is performing in a satisfactory manner.
• Forecast accuracy
• Accuracy and control of forecast is a vital aspect of forecasting, so
forecasters want to minimize forecast errors. Decision makers will want to
include accuracy as a factor when choosing among different techniques,
along with cost. Accurate forecast are necessary for the success of daily
activities of every business organization. Forecasts are the basis for an
organization’s schedules, and unless the forecasts are accurate,
schedules will be generated that may provide for too few or too many
resources, too little ort too much output, or the wrong timing output, all of
which can lead to additional costs, dissatisfied customers, and headaches
for managers.
• Approaches to forecasting
• There are two general approaches to forecasting:
• 1. Qualitative. This method consist mainly of subjective inputs, which
often defy precise numerical description.
• 2. Quantitative. This involve either the projection of historical data or the
development of associative models that attempt to utilize causal variables
to make a forecast.

• Forecasting technique
• 1. Judgmental forecast. Rely on analysis of subjective inputs obtained
from various sources, such as consumer surveys, the sales staff,
managers and executives, and panel of experts.
• 2. Time series forecast. Simply attempt to project past experience into
the future. These techniques are historical data with the assumption that
future will be like the past.
• 3. Associative model. Use equations that consist of one or more
explanatory variables that can be used to predict demand.

• Qualitative forecasts
• 1. Executive opinions. A small group of upper level managers may meet
and collectively develop a forecast. This approach is often used as part of
long range planning and new product development. It has the advantage
of bringing together the considerable knowledge and talents of various
managers.
• 2. Salesforce opinions. Members of the sales staff or the customer service
staff are often good sources of information because of their direct contact with
consumers. They are often aware of any plan the customers may be
considering for the future.
• 3. Consumer surveys. Because it is the consumers who ultimately determine
demand, it seems natural to solicit input from them. In some instances, every
customer or potential customer can be contacted. The obvious advantage of
consumer surveys is that they can tap information that might not be available
elsewhere.
• 4. Other approach the Delphi method. It has been applied to a variety of
situations, not all of which involve forecasting. An iterative process in which
managers and staff complete a series of questionnaires, each developed from
the previous one, to achieve a consensus forecast. As forecasting tool, the
Delphi method is useful for technological forecasting, that is for assessing
changes in technology and their impact on an organization.
• Forecasts based on Time Series Data
• A time series is a time-ordered sequence of observations taken at regular
intervals. Analysis of time series data require data analysis to identify the
underlying behavior of the series. In addition, there will be random and
perhaps irregular variations. These behaviors can be described as follows:
• 1. Trend. Refers to a long term upward or downward movement in the data.
Population shifts, changing incomes, and cultural changes
• 2. Seasonality. Refers to short term fairly regular variations generally related
to factors such as the calendar or time of day. Restaurants, supermarkets,
and theaters experience weekly and even daily seasonal variations.
• 3. Cycles. Are wavelike variations of more than one year’s duration. These
are often related to a variety of economic, political, and even agricultural
conditions.
• 4. Irregular variations. Are due to unusual circumstances such as severe
weather conditions, strikes, or a major change in product or service.
• 5. Random variations. Are residual variations that remain after all other
behaviors have been accounted for.

• Other forecasting methods

• 1. Focus forecasting. Some companies use forecasts based on a best recent
performance basis. This approach called focus forecasting, was developed by
Bernard T. Smith, and is described in several of his books. It involves the use of
several forecasting method.
• 2. Diffusion models. When new product or services are introduced, historical
data are not generally available on which to base forecasts. Instead, predictions
are based on rates of product adoption and usage spread from other established
products using mathematical diffusion models.
 References

• Stevenson, William J. (2018) Operations Management, New York, NY

10121, McGraw-Hill Education
Thank you!