Forecasting

FORECASTING

WHAT IS FORECASTING?Process of predicting a future event based on historical dataEducated GuessingIt is an underlying basis of all business decisions:ProductionInventoryPersonnelFacilities

WHY DO WE NEED TO FORECAST?Throughout the day we forecast very different things such as weather, traffic, stock market, state of our company from different perspectives.

Virtually every business attempt is based on forecasting.

Not all of them are derived from sophisticated methods.

However, Best" educated guesses about future are more valuable for purpose of Planning than no forecasts at all, and hence no planning.

Departments throughout the organization depend on forecasts to formulate and execute their plans.

Finance needs forecasts to project cash flows and capital requirements.

Human resources need forecasts to anticipate hiring needs.

Production needs forecasts to plan production levels, workforce, material requirements, inventories, etc. IMPORTANCE OF FORECASTING IN OPERATIONS MANAGEMENT

Demand is not the only thing of interest to forecasters.

Besides demand, service providers are also interested in forecasts of population, of other demographic variables, of weather, etc.

7. Manufacturers also forecast:Worker absenteeismMachine availabilityMaterial costsTransportation and Production lead times, etc.

IMPORTANCE OF FORECASTING IN OPERATIONS MANAGEMENT

DEMAND FORECASTING

When a product is produced for a market, the demand occurs in the future.

The production planning cannot be accomplished unless the volume of the demand is known.

The success of the business in supplying the demand in the most efficient & profitable way will then depend on the accuracy of the forecasting process in predicting the future demand.

SOME REASONS WHY FORECASTING IS ESSENTIAL IN PRODUCTION OPERATIONS MANAGEMENT (POM)New Facility Planning: It can take as long as five years to design and build a new factory or design and implement a new production process. Such activities require long range forecasts of demand for existing and new products so that operations managers can have the necessary lead time to build factories and install processes to produce products and services when needed.Production Planning: Demands for products and services vary rom month to month. Production rates must be scaled up or down to meet theses demands. It can take several months to change the capacities of production processes. Operations managers need medium range forecasts so that they can have the lead time necessary to provide the production capacity to produce these variable monthly demands. Work Force Scheduling: Demands for products and services vary from week to week. The work force must be scaled up or down to meet these demands by using reassignment, overtime, layoffs, or hiring. Operations managers need short-range forecast so that they can have the lead time necessary to provide work force changes to produce the weekly demands.

SOME OF THE THINGS THAT MUST BE FORECASTED IN PRODUCTION OPERATIONS MANAGEMENT (POM)

Forecast Horizon Time SpanExamples of Things That Must Be ForecastedSome Typical Units of ForecastsLong-RangeYearsNew Product LinesOld Product LinesFactory Capacities

Capital FundsFacility NeedsDollarsDollarsGallons, hours, pounds

DollarsSpace, volumeLong-RangeMonthsProduct GroupsDepartmental Capacities

Work ForcePurchased MaterialsInventoriesUnitsHours, strokes, pounds, gallons, units, etc.

Workers, hours, Units, pounds, gallonsUnits, dollarsShort-RangeWeeksSpecific ProductsLabour skill classesMachine Capacities

CashInventoriesUnitsWorkers, hours,Units, hours, gallons

DollarsUnits, dollars

TYPES OF FORECASTS BY TIME HORIZONShort-range forecast Usually < 3 monthsJob scheduling, worker assignmentsMedium-range forecast3 months to 2 yearsSales/production planningLong-range forecast> 2 yearsNew product planningDesignof systemDetailed use ofsystemQuantitativemethodsQualitativeMethods

SEVEN STEPS IN THE FORECASTING SYSTEMDetermine the use of the forecast.

Select the items to be forecasted

Determine the time horizon of the forecast, e.g. short, medium or long term.

Select the forecasting model(s), e.g. moving averages, regression analysis, etc.

Gather the data needed to make the forecast.

Make the forecast.

Validate and implement the results.

TECHNIQUES FOR DEMAND FORECASTINGNave techniques adding a certain percentage to the demand for the next year.

Opinion sampling collecting opinions from sales, customers, etc.

Qualitative methods

Quantitative methods

These qualitative methods are:

Executive Judgment: Opinion of a group of high level experts or managers is pooled

Sales Force Composite: Each regional salesperson provides his/her sales estimates. Those forecasts are then reviewed to make sure they are realistic. All regional forecasts are then pooled at the district and national levels to obtain an overall forecast.

Market Research/Survey: Solicits input from customers pertaining to their future purchasing plans. It involves the use of questionnaires, consumer panels and tests of new products and services.

.QUALITATIVE FORECASTING METHODS

Delphi Method:

As opposed to regular panels where the individuals involved are in direct communication, this method eliminates the effects of group potential dominance of the most vocal members.

The group involves individuals from inside as well as outside the organization. QUALITATIVE FORECASTING METHODS

Delphi Method: (cont. )

Typically, the procedure consists of the following steps:Each expert in the group makes his/her own forecasts in form of statements:

The coordinator collects all group statements and summarizes themThe coordinator provides this summary and gives another set of questions to each group member including feedback as to the input of other experts.The above steps are repeated until a consensus is reached.

.QUALITATIVE FORECASTING METHODS

QUANTITATIVE METHODS OF FORECASTING

Causal

There is a causal relationship between the variable to be forecast and another variable or a series of variables. (Demand is based on the policy/ factor, e.g. cement, and build material.)

Demand for next period = f (number of permits, number of loan applications, etc.)

QUANTITATIVE METHODS OF FORECASTING

Time series

The time-series models predict on the assumption that the future is a function of the past.

In other words, they look at what has happened over a period of time and use a series of past data to make a forecast.

If we are predicting the sales of gas heaters, we use the past sales figures of gas heaters to make a forecast.

QUANTITATIVE METHODS OF FORECASTING

2. Time series (cont. )

D = F(t) where: D is the variable to be forecast (1) f(t) is a function whose exact form can be estimated from the past data available on the variable. (2) The values of the variable for the future is a function of its values in the past. Dt+1 = f ( Dt , Dt-1 , Dt-2 , .) (3) There exists a function whose form must be estimated using the available data. The most common technique for estimation of equation is Regression Analysis.

We use the equation:

THE END

**At this point, it may be useful to point out the time horizons considered by different industries. For example, some colleges and universities look 30 to fifty years ahead, industries engaged in long distance transportation (steam ship, railroad) or provision of basic power (electrical and gas utilities, etc.) also look far ahead (20 to 100 years). Ask them to give examples of industries having much shorter long-range horizons.