Forecasting for Operations

Planning
Qualitative Methods
Quantitative Methods
 What is Forecasting?
• Business and economic conditions do not
remain the same over time.
• It is necessary for management to be aware of
the changes and their effect on their
organisation.
• Forecasting is the art and science of making
better estimates for future events
 How is Forecasting done?

It is done by taking historical data and projecting

them into the future with –
– some mathematical model,
– a manager’s intuition and judgement
or
– a combination of both.
 FORECASTING TIME HORIZON
A forecast is classified by the future time horizon that it
covers. Time horizons are divided into following categories:
1. Short range forecast: time span of up to one year, but in
practice the time span is generally less than three months.
It is used for planning of material purchasing, job
scheduling, workforce levels, job assignments, and
production levels.
2. Medium range forecast: time span of 3 months to 3 years.
It is useful in sales planning, production planning and
budgeting, and analysing various operating plans.
3. Long- range forecasts: time span of 3 years or more. It is
useful in planning for new products, capital expenditures,
facility location, capacity expansion, and research and
development.
 DEMAND FORECASTS
Demand forecasts are projections of demand for a
company’s products or services
• These forecasts (also called sales forecasts), are
projections of a company’s sales for each time
period in the planning horizon.
• They are the basis for a company’s
– production planning,
– capacity planning,
– scheduling planning, and
– form a basis for financial planning, marketing
planning, and personnel planning.
 STRATEGIC IMPORTANCE OF
FORECASTING
• Forecast forms the basis for planning.
• Good forecasts are of critical importance in
almost all aspects of a business.
• The forecast is an estimation of demand until
actual demand becomes known.
• Forecasts of demand are the basis of decisions in
many areas.
• Following is the impact of product forecast on
three activities: human resource, capacity, and
material management.
 HR
Human Resources – Hiring, training and laying
off workers all depend on anticipated
demand.
If workers are assigned to production floor
without adequate training, the quality of work
goes down resulting in decline in production.
 Capacity & Materials Mgmt
• Capacity – if capacity is not enough, shortages
occur. This results in undependable delivery,
loss of customers, and loss of market share.
But an excess capacity increases fixed costs –
thus increase in product cost.
• Materials Management – Accurate forecasts
help to build good relations with suppliers
resulting in a price advantage for materials
and parts.
 FORECASTING APPROACHES

There are two approaches to business

forecasting: The Qualitative and the
Quantitative approach.
– Quantitative forecasts use a variety of
mathematical models that are based on historical
data and/or causal variables to forecast demand.
– Qualitative (Subjective) forecasts use factors such
as decision maker’s intuition, judgement, and
personal experiences in developing a forecast.
QUALITATIVE METHODS
1. Executive opinion (Expert Opinion) – This technique
takes the opinions of a small group of high-level
experts or managers and combines them to obtain a
group estimate of demand. Bristol-Meyers Company,
eg., uses 220 well known research scientists as its jury
of executive opinion to estimate the future trends in
medical research.
2. Market surveys – It requires input from customers or
potential customers regarding future purchase plans.
It can help not only in preparing a forecast but also in
improving product design and planning for new
products.
3. Delphi Method – There are three different types of
participants in the Delphi method: decision makers,
staff persons, and respondents. Decision makers
usually consist of a group of 5 to 10 experts who will be
making the actual forecast, staff persons assist decision
makers by preparing, distributing, collecting, and
summarising a series of questionnaires and survey
results. The respondents are a group of people, often
located in different places, whose judgements are
valued. This group provides inputs to the decision
makers before the forecast is made. Delphi technique
is mostly used for technological forecasting.
4. Grassroots Method. The ‘grassroots’ is a method
which base on the concept of asking the people who
are close to the eventual consumer, such as sales
person, each member of the sales force report the
trends of their own region, until the entire forecast is
built up, therefore it also call “Sales Force Forecast”.
The benefit of this is that a broad survey might miss
out some important detail problems, however, a very
detail survey or technical study about the data might
cost much and can overlook current market trend. The
personal connection in grassroots method can bring
out the suggestion about what consumers will think
about the product.
Type Characteristics Strength Weakness
Executive A group of managers Good for strategic or new- One person’s
opinion meet and come up product forecasting opinion can
with a forecast dominate the
forecast.
Market Uses surveys and Good determinant of It can be difficult to
research interviews to customer preferences. develop a good
identify customer questionnaire.
preferences.
Delphi Seeks to develop a Excellent for forecasting Time-consuming to
consensus among a long-term product develop.
group of experts. demand, technological
changes, and scientific
advances.

Grassroots Each member of the Obtained from people Might lead to an

method sales force reports who are closer to the over optimistic
on trends of their market hence prediction result (each level
own region. should be more accurate adds a safety
margin)
QUANTITATIVE METHODS
Forecasting methods using historical data are as follows:
1. Time Series Models
a) Graphical Approach
b) Moving Averages (Simple MA & Weighted MA)
c) Trend projection (Linear, Seasonal, Cyclic,
Random)
d) Exponential Smoothing (Single ES Model)
2. Causal Model
a) Regression and Correlation Analysis
b) Multiple Regression Analysis