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WHAT IS FORECASTING???
 Process of predicting a future event
 Underlying basis
of all business decisions
 Production
 Inventory
 Personnel
 Facilities
THE REALITIES!
 Forecasts are seldom perfect
 Most techniques assume an
underlying stability in the system
 Product family and aggregated
forecasts are more accurate than
individual product forecasts
IMPORTANCE OF FORECASTING
1. Forecasting provides relevant and reliable
information about the past and present
events and likely the future events.
2. It gives confidence to the managers for
making important decisions.
3. It is the basis for making planning premises.
4. It keeps managers active and alert to face
the challenges of future events and the
changes in environment.
 LIMITATIONS OF FORECASTING
1. The collection and analysis of data about the past, present and
future involves a lot of time and money. Therefore, managers have
to balance the cost of forecasting with its benefits. Many small firms
don't do forecasting because of the high cost.
2. Forecasting can only estimate the future events. It cannot
guarantee that these events will take place in the future. Long-term
forecasts will be less accurate as compared to short-term forecast.
3. Forecasting is based on certain assumptions. If these assumptions
are wrong, the forecasting will be wrong. Forecasting is based on
past events. However, history may not repeat itself at all times.
4. Forecasting requires proper judgment and skills on the part of
managers. Forecasts may go wrong due to bad judgment and skills
on the part of some of the managers. Therefore, forecasts are
subject to human error.
TYPES OF FORECASTING
Organizations use three major types of forecasts in planning
future operations.
1. Economic forecasts: It addresses the business cycle by
predicting inflation rates, money suppliers, housing starts, and
other planning Indicators.
2. Technological forecasts: These are concerned with rates of
technological progress, which can result in the birth of exciting
new products, requiring new plants and equipment.
3. Demand forecasts: These are projections of demand for a
company’s products or services. These are forecasts, also
called sales forecasts, drive a company’s production, capacity,
and scheduling systems and serve as inputs to financial,
marketing, and personnel planning.
FORECASTING TIME HORIZONS
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job
assignments, production levels
 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
METHODS OF FORECASTING
FORECASTING APPROACHES

Qualitative Methods
 Used when little data exist
 New products
 New technology
 Involves intuition, experience
 e.g., forecasting sales on Internet
QUALITATIVE METHODS
1. Jury of executive opinion (Pool opinions of
high-level experts, sometimes augment by
statistical models)
2. Delphi method (Panel of experts, queried
iteratively until consensus is reached)
3. Sales force composite (Estimates from
individual salespersons are reviewed for
reasonableness, then aggregated)
4. Consumer Market Survey (Ask the customer)
QUANTITATIVE APPROACHES
 Used when situation is ‘stable’
and historical data exist
 Existing products
 Current technology
 Involves mathematical techniques
 e.g., forecasting sales of LCD
televisions
QUANTITATIVE APPROACHES

1. Naive approach
2. Moving
averages time-series
models
3. Exponential
smoothing
4. Trend associative
projection model
5. Linear
regression
NAIVE APPROACH
 Assumes demand in next
period is the same as
demand in most recent period
 e.g., If January sales were 68, then
February sales will be 68
 Sometimes cost effective and
efficient
 Can be good starting point
 MOVING AVERAGE METHOD
 MA is a series of arithmetic means
 Used if little or no trend

 Used often for smoothing

 Provides overall impression of data over
∑ demand in previous n periods
time
Moving average =
n
WEIGHTED MOVING AVERAGE
 Used when some trend might be
present
 Older data usually less important
 Weights based on experience and
intuition
∑ (weight for period n)
Weighted x (demand in period n)
moving average =
∑ weights
MOVING AVERAGE EXAMPLE
Actual 3-Month
Month Shed Sales Moving Average

January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
 EXPONENTIAL SMOOTHING
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant ()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of past data
Last period’s forecast
+ a (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + a(At – 1 - Ft – 1) where Ft = new forecast

Ft – 1 = previous forecast
a = smoothing (or
weighting)
constant (0 ≤ a ≤ 1)
TREND PROJECTIONS
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
^
y = a + bx

^ where y = computed value of the

variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable