Forecasting

Chapter 4 – Forecasting

What is Forecasting?

Process of predicting a future event
PowerPoint presentation to accompany Heizer/Render Operations Management, 8e

Underlying basis of all business decisions
Production Inventory Personnel Facilities

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Forecasting Time Horizons
ShortShort-range forecast
Up to 1 year,generally less than 3 months Purchasing, job scheduling, workforce levels, job assignments, production levels

Distinguishing Differences
Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes ShortShort-term forecasting usually employs different methodologies than longer-term longerforecastingShortShort-term forecasts tend to be more accurate than longer-term forecasts longer4–3

MediumMedium-range forecast
3 months to 3 years Sales and production planning, budgeting

LongLong-range forecast
3+ years New product planning, facility location, research and development
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Influence of Product Life Cycle
Introduction – Growth – Maturity – Decline Introduction and growthrequire longer forecasts than maturity and decline As product passes through life cycle, forecasts are useful in projecting
Staffing levels Inventory levels Factory capacity

Types of Forecasts
Economic forecasts
Address business cycle – inflation rate, money supply, housing starts, etc.

Technological forecasts
Predict rate of technological progress Impacts development of new productsDemand forecasts
Predict sales of existing product

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Strategic Importance of Forecasting

Seven Steps in Forecasting 1. Determine the use of the forecast

Human Resources – Hiring, training, laying off workers Capacity – Capacity shortages can result in undependable delivery, loss of customers, loss of market share SupplySupply-Chain Management – Goodsupplier relations and price advance

2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data 6. Make the forecast 7. Validate and implement results

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The Realities!

Forecasting Approaches

Qualitative Methods Forecasts are seldom perfect Most techniques assume an underlying stabilityin the system Product family and aggregated forecasts are more accurate than individual product forecasts
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Used when situation is vague and little data exist
New products New technology

Involves intuition, experience
e.g., forecasting sales on Internet
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Forecasting Approaches

Overview of Qualitative Methods

Quantitative Methods Used when situation is‘stable’ and historical data exist
Existing products Current technology

Jury of executive opinion
Pool opinions of high-level highexecutives, sometimes augment by statistical models

Delphi method
Panel of experts, queried iteratively

Involves mathematical techniques
e.g., forecasting sales of color televisions
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Overview of Qualitative Methods

Juryof Executive Opinion

Sales force composite
Estimates from individual salespersons are reviewed for reasonableness, then aggregated

Involves small group of high-level highmanagers Group estimates demand by working together Combines managerial experience with statistical models Relatively quick ‘Group‘Group-think’ disadvantage

Consumer Market Survey
Ask the customer

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Sales Force Composite

Delphi Method

Each salesperson projects his or her sales Combined at district and national levels Sales reps know customers’ wants Tends to be overly optimistic

Iterative group process, continues until consensus is reached Staff (Administering 3 types of survey) participants
Decision makers Staff Respondents
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Decision Makers (Evaluate...