9a Forecasting

Forecasting
Ahmed Ata Khan

What Is Forecasting?
Forecasting is a technique that uses historical
data as inputs to make informed estimates that
are predictive in determining the direction of
future trends.
Production forecasting is the estimation of
future demand for a company's goods and
services.
It also predicts the number of resources that are
required to manufacture specific product lines.
Resources could include manual labor, funds,
machinery, and raw materials.
Forecasting is the art and science of predicting
what will happen in the future.
Making good estimates is the main purpose of
forecasting.
Every day, operations managers make decisions
with uncertain outcomes.
Sometimes that is determined by a mathematical
method; sometimes it is based on the intuition of
the operations manager.
Most forecasts and end decisions are a
combination of both.
Accurate production forecasting evaluates the
6 M's of management:
Men (human resources)

Money (financial resources)
Materials (inventory)
Machines (machinery)
Methods (procedures)
Market (where to sell)
Types of Production Forecasting
Production forecasting also considers future
technological advancements that could enhance
manufacturing, as well as competitors' strategies to
maintain customer satisfaction.
Trends
◦ This method generates an accurate forecast as long as the
trend remains stable. However, some trends may vary, in
which case management must re-calculate their forecasts to
fine-tune the estimate.
Patterns
◦ If management can define seasonal or monthly pattern
changes, they can formulate a more accurate forecast.
Patterns usually develop during events or seasonal changes,
such as holidays, weather, or busy months.
Types of Production Forecasting
Cycles
◦ Cycles refer to long-term variations based on the
fluctuating market and economy. If a business is at the
beginning of an economic expansion, they may experience
heightened demand for an extended period. However, when
the cycle ends, demand may plummet. Therefore,
management needs to align economic cycles with the
company trends and patterns to get an accurate estimate.
Inventory
◦ Companies must keep minimum inventory levels at all
times to meet short-term demand. If stock levels are too
high, companies should lower their production until
inventory returns to a healthy level. Keeping excessive
volumes of products on hand can limit operational
efficiency, storage space, and inventory turnover rates.
Types of Forecasting?
 Forecasting is conducted by what are referred to as
time horizons.
 Short range forecast.
◦ While it can be up to one year, this forecast is usually used
for three months or less. It is used for planning purchases,
hiring, job assignments, production levels, and the like.
 Medium range forecast.
◦ This is generally three months to three years. Medium range
forecasts are used for sales and production planning,
budgeting, and analysis of different operating plans.
 Long range forecast.
◦ Generally three years or more in time span, it is used for
new products, capital expenditures, facility expansion,
relocation, and research and development.
Types of Forecasting? (Time)
Short term forecasts are more accurate than
medium or long range forecasts.
A lot can change in three months, a year, three
years, and longer.
Factors that could influence those forecasts
change every day.
Short term forecasts need to be updated
regularly to maintain their effectiveness.
Short term forecasts use different
methodologies than the others.
Most short term forecasts are quantitative in
nature and use existing data in mathematical
formulas to anticipate immediate future needs and
impacts.
Medium and long range forecasts are more
comprehensive in nature.
They support and guide management decisions in
planning products, processes, and plants.
A new plant can take seven or eight years from the
time it is thought of, until it is ready to move into
and become functional.
There are three major types of forecasting,
regardless of time horizon, that are used by
organizations.
Economic Forecasts
◦ They address the business cycle.
◦ They predict housing starts, inflation
rates, money supplies, and other
indicators.
Types of Forecasting?
Technological forecasts
◦ monitor rates of technological progress.
◦ This keeps organizations abreast of trends and can result
in exciting new products.
◦ New products may require new facilities and equipment,
which must be planned for in the appropriate time frame.
Demand forecasts
◦ They deal with the company's products and estimate
consumer demand.
◦ These are also referred to as sales forecasts, which have
multiple purposes.
◦ In addition to driving scheduling, production, and
capacity, they are also inputs to financial, personnel, and
marketing future plans.
Steps of Production Forecasting
These seven steps can generate forecasts.
1. Determine what the forecast is for.

2. Select the items for the forecast.
3. Select the time horizon.
4. Select the forecast model type.
5. Gather data to be input into the model.
6. Make the forecast.
7. Verify and implement the results.
Routinely repeat these steps, regardless of the time

horizon, to stay abreast of changes in regard to internal
and external factors.
Strategic Importance of Forecasts
Operations managers have two tools at their disposal
by which to make decisions: actual data and
forecasts.
The importance of forecasting cannot be
underestimated.
Take a product forecast and the functions of human
resources, capacity, and supply chain management.
The workforce is based on demand.
This includes hiring, training, and lay-off of workers.
If a large demand is suddenly thrust upon the
organization, training declines and the quality of the
product could suffer.
Strategic Importance of Forecasts
When the capacity cannot keep up to the demand, the
result is undependable delivery, loss of customers,
and maybe loss of market share.
Yet, excess capacity can skyrocket costs.
Last minute shipping means high cost.
Asking for parts last minute can raise the cost.
Most profit margins are slim, which means either of
those scenarios can wipe out a profit margin and
have an organization operating at cost -- or at a loss.
Good operations managers learn how to forecast, to
trust the numbers, and to trust their instincts to make
the right decisions for their firm.
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Forecasting

Ahmed Ata Khan

Men (human resources)

1. Determine what the forecast is for.

Routinely repeat these steps, regardless of the time

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