EXPRODU

Forcasting
Agenda – Week 3
EXPRODU

 Basics of Forecasting

 Types of Forecasting

 The Strategic Importance Of Forecasting

 Seven Steps In The Forecasting System

 Forecasting Approaches

2
What is forcasting?
Basics of Forecasting

 Process of predicting a future event

 Underlying basis of all business decisions

– Production
– Inventory
– Personnel
– Facilities

3
Forecasting Time Horizons
Basics of Forecasting

Short-range forecast
– Up to 1 year, generally less than 3 months
– Purchasing, job scheduling, workforce levels, job assignments, production levels
– Forecasting usually employs different methodologies than longer-term forecasting
– Forecasts tend to be more accurate than longer-term forecasts

Medium-range forecast*
– 3 months to 3 years
– Sales and production planning, budgeting

Long-range forecast*
– 3+ years
– New product planning, facility location, research and development

* Forecasts deal with more comprehensive issues and support management decisions
regarding planning and products, plants and processes 4
Influence of the Product Life Cycle on Forcasting
Basics of Forecasting

 Introduction and growth require longer forecasts than maturity and decline

 As product passes through life cycle, forecasts are useful in projecting

– Staffing levels
– Inventory levels
– Factory capacity

5
Agenda – Week 3
EXPRODU

 Basics of Forecasting

 Types of Forecasting

 The Strategic Importance Of Forecasting

 Seven Steps In The Forecasting System

 Forecasting Approaches

6
Three types of Forcasting
Types of Forecasting

Economic Forecasts
– Address business cycle –inflation rate, money supply, housing starts, etc.

Technological forecasts
– Predict rate of technological progress
– Impacts development of new products

Demand forecasts
– Predict sales of existing product

7
Agenda – Week 3
EXPRODU

 Basics of Forecasting

 Types of Forecasting

 The Strategic Importance Of Forecasting

 Seven Steps In The Forecasting System

 Forecasting Approaches

8
Forecasting is also used in other departments
The Strategic Importance Of Forecasting

 Human Resources –Hiring, training, laying off workers

 Capacity –Capacity shortages can result in undependable delivery, loss of

customers, loss of market share

 Supply-Chain Management –Good supplier relations and price advance

9
Agenda – Week 3
EXPRODU

 Basics of Forecasting

 Types of Forecasting

 The Strategic Importance Of Forecasting

 Seven Steps In The Forecasting System

 Forecasting Approaches

10
Seven important steps in forecasting should be followed
Seven Steps In The Forecasting System

1. Determine the use of the forecast

2. Select the items to be forecasted

3. Determine the time horizon of the forecast

4. Select the forecasting model(s)

5. Gather the data

6. Make the forecast

7. Validate and implement results

11
Agenda – Week 3
EXPRODU

 Basics of Forecasting

 Types of Forecasting

 The Strategic Importance Of Forecasting

 Seven Steps In The Forecasting System

 Forecasting Approaches

12
Forecasting can be used in both Qualitative and Quantitative
areas of a company
Forecasting Approaches

Qualitative method
– Qualitative forecasting techniques are subjective, based on the opinion and judgment of
consumers, experts; appropriate when past data is not available
– Used when situation is vague and little data exist
 New products
– Involves intuition, experience
 e.g., opinion

Quantitative method
– Quantitative forecasting models are used to estimate future demands as a function of
past data; appropriate when past data are available
 Existing products
– Involves mathematical techniques
 e.g., forecasting sales of color televisions

13
Overview of Qualitative Methods
Forecasting Approaches

Jury of executive opinion

– Pool opinions of high-level executives, sometimes augment by statistical models

Delphi method
– Panel of experts, queried iteratively

Sales force composite

– Estimates from individual salespersons are reviewed for reasonableness, then
aggregated

Consumer Market Survey

– Ask the customer

14
Overview of Qualitative Methods: Jury of executive opinion
Forecasting Approaches

– Involves small group of high-level managers

– Group estimates demand by working together

– Combines managerial experience with statistical models

– Relatively quick

– ‘Group-think’ disadvantage

15
Overview of Qualitative Methods: Delphi Method
Forecasting Approaches
Decision Makers
– Iterative group process, continues until consensus is reached (Evaluate responses and
– 3 types of participants make decisions)
 Decision makers
 Staff
 Respondents

Staff
(Administering
survey)

Respondents
(People who can make
valuable judgments)

16
Overview of Qualitative Methods: Sales Force Composite
Forecasting Approaches

– Each salesperson projects his or her sales

– Combined at district and national levels

– Sales reps know customers’ wants

– Tends to be overly optimistic

17
Overview of Qualitative Methods: Consumer Market Survey
Forecasting Approaches

– Ask customers about purchasing plans

– What consumers say, and what they actually do are

often different

– Sometimes difficult to answer

18
Overview of Quantitative Methods: Arithmetic Straight Line
Forecasting Approaches

Formula: TY-BY
n

Where: TY = Terminal Year (Last Data)

BY = Base Year ( First Data)
n = Number of years

19
Overview of Quantitative Methods: Arithmetic Straight Line
Forecasting Approaches

Year Sales (Y)

1 100 (BY)
2 200
3 300
4 400
5 500 (TY)

= (500-100) / 5

= 400/5

= 80 = Growth

20
Overview of Quantitative Methods: Arithmetic Straight Line
Forecasting Approaches

 Projections
 Add the latest year and the growth to get the projection

Year 6 = 500 + 80 = 580

Year 7 = 580 + 80 = 660 Sales projection

Year 8 = 660 + 80 = 740

21
Overview of Quantitative Methods: Linear Regression
Forecasting Approaches

 Fitting a trend line to historical data points to project into the medium-to-long-range
 Linear trends can be found using the least squares technique
 the simplest form of regression that involves a linear relationship between two variables

Formula: ŷ = a + bx

Where: ŷ = computed value of the variable to be predicted (dependent variable)

a = y-axis intercept
Ʃy/n
b = slope of the regression line
Ʃxy/Ʃx2
x = the independent variable though to predict the value of the dependent
variable

22
Overview of Quantitative Methods: Linear Regression
Forecasting Approaches

Year X Sales (Y) XY X2

1 -2 100 (200) 4
2 -1 200 (200) 1
3 0 300 0 0
4 1 400 400 1
5 2 500 1000 4
Ʃ y = 1500 Ʃ x y = 1000 Ʃ x2= 10
a=Ʃy/n
= 1500/5
= 300

b = Ʃ x y / Ʃ x2
= 1000/10
= 100
23
Overview of Quantitative Methods: Linear Regression
Associative Forecasting Methods

 Projections

Formula: ŷ = a + bx

Year 6 = 300 + [100 (3)] = 600

Year 7 = 300 + [100 (4)] = 700 Sales projection

Year 8 = 300 + [100 (5)] = 800

24
Overview of Quantitative Methods: Linear Regression
Forecasting Approaches

Odd Even

Year X Year X
1 -2 1 -5
2 -1 2 -3
3 0 3 -1
4 1 4 1
5 2 5 3
6 5

25
Overview of Quantitative Methods:
AAGR – Average Arithmetic Growth Rate
Forecasting Approaches

 The average increase in the value of an individual investment or portfolio over the
period of a year
 It is calculated by taking the arithmetic mean of the growth rate over two annual
periods.

Formula: AAGR= year 2 – year 1

year 1
Year Sales (y) % Growth
1 100 - =(200 – 100) / 100
=1
2 200 1
3 300 .5
4 400 .33
5 500 .25
Ʃ%Growth = 2.08
26
Overview of Quantitative Methods:
AAGR – Average Arithmetic Growth Rate
Forecasting Approaches

 Projections
Formula: AAGR = year 2 – year 1
year 1

Divide total growth rate with the number of years given

2.08 = 0.52 or 52%

4
Year 6 = 500 x 0.52 = 260
500 + 260 = 760
Sales projection
Year 7 = 760 x 0.52 = 395.2
760 + 395.2 = 1,155.2

27