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    Forecasting

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    Hya Althea Diamante
    This document discusses various forecasting methods used in operations management including qualitative methods like executive judgement and quantitative methods like time series analysis. It explains key time series models like simple moving average, weighted moving average, and exponential smoothing. Regression analysis is also covered as a method to establish relationships between variables to improve forecasts. Web-based collaborative forecasting tools like CPFR are summarized. General principles for effective forecasting are outlined.

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    Forecasting

    Uploaded by

    Hya Althea Diamante
    8 views61 pages
    This document discusses various forecasting methods used in operations management including qualitative methods like executive judgement and quantitative methods like time series analysis. It explains key time series models like simple moving average, weighted moving average, and exponential smoothing. Regression analysis is also covered as a method to establish relationships between variables to improve forecasts. Web-based collaborative forecasting tools like CPFR are summarized. General principles for effective forecasting are outlined.

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    OTM

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    This document discusses various forecasting methods used in operations management including qualitative methods like executive judgement and quantitative methods like time series analysis. It explains key time series models like simple moving average, weighted moving average, and exponential smoothing. Regression analysis is also covered as a method to establish relationships between variables to improve forecasts. Web-based collaborative forecasting tools like CPFR are summarized. General principles for effective forecasting are outlined.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    8 views61 pages

    Forecasting

    Uploaded by

    Hya Althea Diamante
    This document discusses various forecasting methods used in operations management including qualitative methods like executive judgement and quantitative methods like time series analysis. It explains key time series models like simple moving average, weighted moving average, and exponential smoothing. Regression analysis is also covered as a method to establish relationships between variables to improve forecasts. Web-based collaborative forecasting tools like CPFR are summarized. General principles for effective forecasting are outlined.

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    Forecasting

    Introduction

    Operations Strategy & Competitiveness

    Quality Management
    Strategic Decisions (some)
    Design of Products Process Selection Capacity and
    and Services and Design Facility Decisions

    Forecasting

    Tactical & Operational Decisions


    Predict the next number in the pattern:

    a) 3.7, 3.7, 3.7, 3.7, 3.7, ?

    b) 2.5, 4.5, 6.5, 8.5, 10.5, ?

    c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, ?


    Predict the next number in the pattern:

    a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7

    b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5

    c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, 9.0


    What is Forecasting?
    ◼ Process of predicting a future event
    based on historical data
    ◼ Educated Guessing
    ◼ Underlying basis of
    all business decisions
    ✓ Production
    ✓ Inventory
    ✓ Personnel
    ✓ Facilities
    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 the future are more valuable for the
    purpose of Planning than no forecasts and hence no planning.
    Importance of Forecasting in OM
    • 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 OM

    • Demand is not the only variable of interest to forecasters.

    • Manufacturers also forecast worker absenteeism, machine


    availability, material costs, transportation and production lead
    times, etc.

    • Besides demand, service providers are also interested in


    forecasts of population, of other demographic variables, of
    weather, etc.
    Forecasting During the Life Cycle
    Qualitative Forecasting Methods
    Qualitative Methods
    Briefly, the 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 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.

    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 them
    ➢The 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 Methods
    Delphi Method:

    l. Choose the experts to participate representing a variety of


    knowledgeable people in different areas
    2. Through a questionnaire (or E-mail), obtain forecasts (and any
    premises or qualifications for the forecasts) from all participants
    3. Summarize the results and redistribute them to the participants
    along with appropriate new questions
    4. Summarize again, refining forecasts and conditions, and again
    develop new questions
    5. Repeat Step 4 as necessary and distribute the final results to all
    participants
    .
    Quantitative Forecasting Methods
    Time Series Models
    Try to predict the future based on past data

    Assume that factors influencing the past will continue


    to influence the future
    Time Series Models
    Time series forecasting models try to predict the future based
    on past data
    You can pick models based on:
    1. Time horizon to forecast
    2. Data availability
    3. Accuracy required
    4. Size of forecasting budget
    5. Availability of qualified personnel
    Time Series Models: Components

    Random Trend

    Composite
    Seasonal
    Product Demand over Time
    Product Demand over Time
    Quantitative Forecasting Methods
    Naive Approach
    2a. Simple Moving Average
    What if ipod sales were actually 3 in month 4
    2a. Simple Moving Average

    Forecast for Month 5?


    2a. Simple Moving Average

    Actual Demand for Month 5 = 7


    2a. Simple Moving Average
    Forecast for Month 6?
    2b. Weighted Moving Average
    3a. Exponential Smoothing – Example 3
    Company A, a personal computer producer purchases
    generic parts and assembles them to final product. Even though
    most of the orders require customization, they have many
    common components. Thus, managers of Company A need a
    good forecast of demand so that they can purchase computer
    parts accordingly to minimize inventory cost while meeting
    acceptable service level. Demand data for its computers for the
    past 5 months is given in the following table.
    3a. Exponential Smoothing

    ◼How to choose α
    ✓depends on the emphasis you want to place
    on the most recent data

    ◼Increasing α makes forecast more


    sensitive to recent data
    To Use a Forecasting Method
    ◼ Collect historical data
    ◼ Select a model
    ✓ Moving average methods
    ◼ Select n (number of periods)
    ◼ For weighted moving average: select weights
    ✓ Exponential smoothing
    ◼ Select 

    ◼ Selections should produce a good forecast


    …but what is a good forecast?
    A Good Forecast

     Has a small error


     Error = Demand - Forecast
    Measures of Error
    Forecast Bias
    Quantitative Forecasting Methods
    Exponential Smoothing (continued)
    Exponential Smoothing (continued)
    Regression Analysis as a Method for
    Forecasting
    Regression analysis takes advantage of the
    relationship between two variables. Demand is
    then forecasted based on the knowledge of this
    relationship and for the given value of the
    related variable.

    Ex: Sale of Tires (Y), Sale of Autos (X) are


    obviously related

    If we analyze the past data of these two variables


    and establish a relationship between them, we
    may use that relationship to forecast the sales
    of tires given the sales of automobiles.

    Sales of Autos (100,000)


    The simplest form of the relationship is, of course,
    linear, hence it is referred to as a regression
    line.
    Formulas
    y= a + bx
    where,
    Regression – Example
    Web-Based Forecasting
    • Collaborative Planning, Forecasting, and Replenishment (CPFR) a Web-
    based tool used to coordinate demand forecasting, production and purchase
    planning, and inventory replenishment between supply chain trading
    partners.

    • Used to integrate the multi-tier or n-Tier supply chain, including


    manufacturers, distributors and retailers.

    • CPFR’s objective is to exchange selected internal information to provide for


    a reliable, longer term future views of demand in the supply chain.

    • CPFR uses a cyclic and iterative approach to derive consensus forecasts.


    Web-Based Forecasting:
    Steps in CPFR
    1. Creation of a front-end partnership agreement
    2. Joint business planning
    3. Development of demand forecasts
    4. Sharing forecasts
    5. Inventory replenishment
    General Guiding Principles for
    Forecasting
    1. Forecasts are more accurate for larger groups of items.
    2. Forecasts are more accurate for shorter periods of time.
    3. Every forecast should include an estimate of error.
    4. Before applying any forecasting method, the total system should be
    understood.
    5. Before applying any forecasting method, the method should be tested
    and evaluated.
    6. Be aware of people; they can prove you wrong very easily in forecasting
    Reference:

    William S. (2015). Operations Management. McGraw-


    Hill Education.

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