3-1 Forecasting

Management Science

PROF. AK MARAVILLAS
Week 12 Lesson

8th edition
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CHAPTER
3

Forecasting

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Forecasting
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FORECAST:
 A statement about the future value of a variable of
interest such as demand.
 Forecasts affect decisions and activities throughout
an organization
 Accounting, finance
 Human resources
 Marketing
 MIS
 Operations
 Product / service design
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Uses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, workloads

Product/service design New products and services

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 Assumes causal system

past ==> future
 Forecasts rarely perfect because of
randomness
 Forecasts more accurate for
groups vs. individuals I see that you will
get an A this semester.
 Forecast accuracy decreases
as time horizon increases
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Elements of a Good Forecast

Timely

Reliable Accurate

Written
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Steps in the Forecasting Process

“The forecast”

Step 6 Monitor the forecast

Step 5 Prepare the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast
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Types of Forecasts

 Judgmental - uses subjective inputs

 Time series - uses historical data
assuming the future will be like the past
 Associative models - uses explanatory
variables to predict the future
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Judgmental Forecasts

 Executive opinions
 Sales force opinions
 Consumer surveys
 Outside opinion
 Delphi method
 Opinions of managers and staff
 Achieves a consensus forecast
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Time Series Forecasts

 Trend - long-term movement in data

 Seasonality - short-term regular variations in
data
 Cycle – wavelike variations of more than one
year’s duration
 Irregular variations - caused by unusual
circumstances
 Random variations - caused by chance
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Forecast Variations
Figure 3.1

Irregular
variatio
n
Trend

Cycles

90
89
88
Seasonal variations
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Naive Forecasts

Uh, give me a minute....

We sold 250 wheels last
week.... Now, next week
we should sell....

The forecast for any period equals

the previous period’s actual value.
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QUALITATIVE
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Quantitative
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Moving Averages

 Moving average – A technique that averages a

number of recent actual values, updated as new
values become available.
n


i=1
Ai
MAn =
n
 Weighted moving average – More recent values in a
series are given more weight in computing the
forecast.
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Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)

• Premise--The most recent observations might
have the highest predictive value.
 Therefore, we should give more weight to the
more recent time periods when forecasting.
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Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)

 Weighted averaging method based on previous
forecast plus a percentage of the forecast error
 A-F is the error term,  is the % feedback
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Sources of Forecast errors

 Model may be inadequate

 Irregular variations

 Incorrect use of forecasting technique

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Linear Regression Forecasting

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Linear Regression Forecasting

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Trend Projection Forecasting

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Choosing a Forecasting Technique

 No single technique works in every situation

 Two most important factors
 Cost
 Accuracy

 Other factors include the availability of:

 Historical data
 Computers

 Time needed to gather and analyze the data

 Forecast horizon
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REFERENCES
 Hillier, F. (2019) Introduction to management
science : a modeling and case studies approach
with spreadsheets. New York, NY : McGraw-
Hill
 Winston, W. (2019) Practical management
science. Mason, OH : Cengage Learning, Inc.
 Stevenson, W. (2018) Operation management.
New York : McGraw-Hill Education.