BUSINESS ADMINISTRATION

DEPARTMENT

LECTURE NO: 3

FORECASTING

COURSE INSTRUCTOR:
SHAGUFTA SALEEM SHAIKH

OPERATIONS MANAGEMENT (BBA 2K19) BY: SHAGUFTA

SALEEM SHAIKH
 Operations Management

FORECASTING

OPERATIONS MANAGEMENT (BBA 2K19) BY: SHAGUFTA

SALEEM SHAIKH
 What is Forecasting?
• In simple terms forecasting means,
“estimation or prediction of future”.
• The prediction of outcomes, trends, or
expected future behavior of a business,
industry sector, or the economy through the
use of statistics.
• Forecasting is an operational research
technique used as a basis for management
planning and decision making.
 What is Forecasting?
 Process of predicting
a future event

 Underlying basis of ??
all business
decisions
 Production
 Inventory
 Facilities
 What is Forecasting?
Webster's: “A forecast is a prediction and its
purpose is to calculate and predict some
future events or condition.”
Neter & Wasserman, “business forecasting is
refers to a statistical analysis of the past and
current movements in the given time series
so as to obtain clues about the future
pattern of those movements.
 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
 Product Life Cycle
 A product life cycle is the length of time
from a product first being introduced
to consumers until it is removed from
the market.
 Product Life Cycle
 Product life cycle is a cycle that a product
goes through, from development to
decline.
 It's typically broken up into four stages.
You can use the product life cycle to
make important decisions and strategies
on advertising budgets, product prices,
and packaging.
 You can create a product life cycle by
identifying these stages for your product.
 Product Life Cycle
There are four phases of Product life cycle:

 Introduction

 Growth

 Maturity

 Decline

Introduction – Growth – Maturity – Decline

 Product Life Cycle
Introduction: The introduction stage is the stage in
which a new product is first distributed and made
available for purchase, after having been
developed in the product development stage .
therefore the introduction stage starts when the
product is first launched.
Growth: - The growth stage is stage in which
product’s sale start climbing quickly. The
consumers are more aware about the product and
have also the experience of it which they share
among their group. which leads to increase in the
sales of particular product.
 Product Life Cycle
Maturity: - The maturity stage is the stage in which
the product’s sales growth slow down or levels off
after reaching a peak. This happens some times
due to market getting saturated. The slowdown in
sales growth is due to many producers with many
product to sale.
Decline: - This is the stage when product’s sale
decline. there maybe many reason of decline in
sale like for instance, technological advances, shift
in consumer taste and increased competition can
play a key role. as sales and profit decline, some
competitors will withdraw from market.
 Product Life Cycle Example
Nokia is considered a favorite example whenever the concept of
product life cycle is discussed.
 Types of Forecasts
Economic forecasts:
 It Address business cycle by predicting inflation rate,
money supply, housing starts, and other planning
indicators.
Technological forecasts:
 These are concerned with rates of technological
progress, which can result in the birth of exciting
new products, requiring new plants and equipments.
Demand forecasts
 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.
 Strategic Importance of
Forecasting
 Human Resources – Hiring, training,
laying off workers

 Capacity – Capacity shortages can result

in undependable delivery, loss of
customers, loss of market share

 Supply-Chain Management – Good

supplier relations and price advance
Factors affect decisions and activities
throughout an organization
Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT systems

Operations Schedules, Workloads

Product/service design New products and services

Seven Steps in Forecasting
 Determine the use of the forecast
 Select the items to be forecasted
 Determine the time horizon of the
forecast
 Select the forecasting model(s)
 Gather the data
 Make the forecast
 Validate and implement results
Forecasting Approaches
Qualitative Methods
 Used when situation is vague and
little data exist
Example:
 New products
 New technology
 Involves intuition, experience
 e.g., forecasting sales on Internet
 Forecasting Approaches
Quantitative Methods
 Used when situation is ‘stable’ and
historical data exist
 Existing products
 Current technology
 Involves mathematical techniques
 e.g., forecasting sales of color
televisions
 Overview of Qualitative
Methods

1. Jury of executive opinion

2. Delphi method
3. Sales force composite
4. Consumer Market Survey
 1. Jury of Executive Opinion
 The Jury Method also called as
an Executive Opinion Method is a sales
forecasting method, wherein the
executives from different departments
come together and forecast sales for the
given period, on the basis of their
experience and specialization.
 Jury of Executive Opinion Conti..
 The jury method is based on the
judgments, the top executives of
Marketing, HR, Finance, Production
department come together and give their
opinions on sales trend.
 The final forecast is arrived by averaging
the opinions given by all at the meeting.
 2. Delphi Method
 This is a group technique in
which a panel of experts is
questioned individually Decision Makers
(Evaluate responses and
about their perceptions of make decisions)
future events.
 Interviewing or gathering
information from the Staff
(Administering
experts one at a time rather survey)
than in a group
 3 types of participants
 Decision makers Respondents
 Staff (People who can make
valuable judgments)
 Respondents
 3. Sales Force Composite
 It is a forecasting method used to
forecast the sales by adding up
individual sales agents forecasts for
sales in their respective sales
territories.
 Sales agents have the most direct
interaction with the customers and
provide many valuable insights which
help the companies boost their sales
4. Consumer Market Survey
 Some companies conduct their own
market surveys regarding specific
consumer purchases.

 Surveys may consist of telephone

contacts, personal interviews, or
questionnaires as a means of
obtaining data.
 Overview of Qualitative
Methods
 Jury of executive opinion
 Pool opinions of high-level executives,
sometimes augment by statistical
models
 Delphi method
 Panel of experts, queried iteratively
 Overview of Qualitative
Methods
 Sales force composite
 Estimates from individual salespersons
are reviewed for reasonableness, then
aggregated
 Consumer Market Survey
 Ask the customer
 Overview of Quantitative
Approaches
1. Trend projection/ Linear Associative
Model
regression/OLS

2. Naive approach
3. Moving averages
Time-Series
4. Exponential Models
smoothing
 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
 Values of Dependent Variable Least Squares Method

Actual observation Deviation7

(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

© 2014 Pearson Education, Inc. 8 - 29
 Values of Dependent Variable Least Squares Method

Actual observation Deviation7

(y value)

Deviation5 Deviation6

Deviation3
Least squares method minimizes the
sum of the squared errors (deviations)
Deviation4

Deviation1
Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

© 2014 Pearson Education, Inc. 8 - 30
 Least Squares Method
Equations to calculate the regression variables

^
y = a + bx

Sxy - nxy
b=
Sx2 - nx2

a = y - bx

© 2014 Pearson Education, Inc. 8 - 31

 Least Squares Example
Time Electrical Power
Year Period (x) Demand (y) x2 xy
1999 1 74 1 74
2000 2 79 4 158
2001 3 80 9 240
2002 4 90 16 360
2003 5 105 25 525
2004 6 142 36 852
2005 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 )
2

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
1999 1 74 1 74
2000 2 79 4 158
2001The trend3 line is 80 9 240
2002 4 90 16 360
^
2003 yY 5= 56.70 + 10.54x
105 25 525
2004 6 142 36 852
2005 7 122 49 854
Sx = 28 Sy = 692 Sx2 = 140 Sxy = 3,063
x=4 y = 98.86

Sxy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
Sx - nx
2 2 140 - (7)(4 )
2

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example
Trend line,
160 – ^ y = 56.70 + 10.54x
150 –
140 –
Power demand

130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
 2. Naive Approach
 A naive forecast is one in which the
forecast for a given period is simply equal
to the value observed in the previous
period.
 For example, suppose we have the
following sales of a given product during
the first three months of the year:
 Naive Approach Conti..
 The forecast for sales in April would
simply be equal to the actual sales from
the previous month of March:
 Naive Approach Conti..
 Assumes demand in next period is
the same as demand in most recent
period

 e.g., If May sales were 48, then June

sales will be 48
Naive Approach Conti..
Year Time Actual sales Forecasted sales
 3. Moving Average Method
 The moving average is extremely useful
for forecasting long-term trends.
 You can calculate it for any period of time.

 For example, if you have sales data for a

twenty-year period, you can calculate a
five-year moving average, a four-year
moving average, a three-year moving
average and so on.
 Moving Average Method Conti..

 MA is a series of arithmetic means

 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data
over time

∑ demand in previous n periods

Moving average =
n
 Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average

January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11
May 19 (12 + 13 + 16)/3 = 13
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19
 Graph of Moving Average
Moving
Average
30 – Forecast
28 –
Actual Sales
26 –
24 –
Shed Sales

22 –
20 –
18 –
16 –
14 –
12 –
10 –
| | | | | | | | | | | |
J F M A M J J A S O N D
© 2014 Pearson Education, Inc. 8 - 42
Weighted Moving Average
 Used when trend is present
 Older data usually less important
 Weights based on experience and
intuition

∑ (weight for period n)

x (demand in period n)
Weighted
moving average =
∑ weights
 Weights Applied Period

Weighted Moving
3 Average
Last month
2 Two months ago
1 Three months ago

6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average

January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1/2
 Moving Average And
Weighted Moving Average
Weighted
moving
30 – average
25 –
Sales demand

20 – Actual
sales
15 –
Moving
10 – average

5 –
| | | | | | | | | | | |
J F M A M J J A S O N D
© 2014 Pearson Education, Inc. 8 - 45
 4. 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
 Exponential Smoothing

t = 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)
 Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20

© 2014 Pearson Education, Inc. 8 - 48

 Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

© 2014 Pearson Education, Inc. 8 - 49

 Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars

© 2014 Pearson Education, Inc. 8 - 50

Common Measures of Error

1. Mean Absolute Deviation (MAD)

∑ Absolute Deviation
MAD =
n

2. Mean Squared Error (MSE)

∑ (forecast errors)2
MSE =
n
Common Measures of Error

3. Mean Absolute Percent Error (MAPE)

100 ∑ actual – forecast / actual

MAPE =
n
 Comparison of Forecast
Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5 175 5
2 168 176 8 178 10
3 159 175 16 173 14
4 175 173 2 166 9
5 190 173 17 170 20
6 205 175 30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
 Comparison of Forecast
Error
∑ |deviations|
Rounded Absolute Rounded Absolute
MADActual
= Forecast Deviation Forecast Deviation
Tonage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5 175 5
2 168 = 84/8 = 10.50 8
176 178 10
3 159 175 16 173 14
4 For a175
= .50 173 2 166 9
5 190 173 17 170 20
6 205 = 100/8
175 = 12.5030 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
 Comparison of Forecast
Error
∑ (forecast
Rounded
errors) 2
Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5 175 5
2 = 7056/8176
168 = 882 8 178 10
3 159 175 16 173 14
4 For a175
= .50 173 2 166 9
5 190 173 17 170 20
6 = 10,000/8
205 175 = 125030 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
 Comparison of Forecast
Error
100 ∑ Actual-Forecast/actual
Rounded Absolute Rounded Absolute
MAPE =Actual Forecast Deviation Forecast Deviation

Quarter
Tonage
Unloaded
with
a = .10
n for
a = .10
with
a = .50
for
a = .50
1
For a
180
= .10 175 5 175 5
2 168 = 94.16/8
176 = 11.77%
8 178 10
3 159 175 16 173 14
4 For a=
175 .50 173 2 166 9
5 190 173 17 170 20
6 205 = 93.05/8
175 = 11.63%
30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
MSE 882 1250
 Comparison of Forecast
Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5 175 5
2 168 176 8 178 10
3 159 175 16 173 14
4 175 173 2 166 9
5 190 173 17 170 20
6 205 175 30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
MSE 194.75 201.50
MAPE 11.77% 11.63%
Thank You 