FORECASTING

3-1
FORECAST:
 A statement about the future value of a
variable of interest such as demand.
 Forecasting is the process of estimating
unknown situation
 Forecasting is used to make informed
decisions.
 Long-range
 Short-range

3-2
 Objectives
 To plan for material requirement
 To plan for product requirement
 To plan for research and development
 To determine budgetary control
 To determine schedule of operation
 To find the working capital needed

3-3
 Forecasts
 Forecasts affect decisions and activities
throughout an organization
 Accounting, finance
 Human resources
 Marketing
 MIS
 Operations
 Product / service design

3-4
 Uses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

3-5
 Features of Forecasts
 Assumes past ==> future
 Forecasts rarely perfect because of
randomness
 Forecasts more accurate for
groups vs. individuals
 Forecast accuracy decreases I see that you will
as time horizon increases get an A this semester.

3-6
Steps in the Forecasting Process

“The forecast”

Step 6 Monitor the forecast

Step 5 Make the forecast
Step 4 Obtain, clean and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

3-7
 Approaches/Types of Forecasts

 Judgmental - uses subjective inputs

 Time series - uses historical data
assuming the future will be like the past
 Associative models - uses explanatory
variables to predict the future

3-8
 Judgmental Forecasts
 Executive opinions – Long range planning
and new product development
 Sales force opinions
 Consumer surveys
 Outside opinion – for political and
economic information
 Delphi method – technological forecast
 Opinions of managers and staff
 Achieves a consensus forecast

3-9
 Time Series Forecasts
 Trend - long-term upward/downward
movement in data eg: Changes in
population, income, culture
 Seasonality - short-term regular
variations related to calendar or time of
day eg:restaurants, theater,supermarket
 Cycle – wavelike variations of more than
one year’s duration eg: economic,
political and agricultural conditions

3-10
 Time Series Forecasts
 Irregular variations - caused by unusual
circumstances eg: severe weather, strikes
 Random variations – redidual variations after
all other behaviours are accounted for
.caused by chance

3-11
 Forecast Variations
Figure 3.1

Irregular
variation

Trend

Cycles

90
89
88
Seasonal variations

3-12
 Associative Forecasting

Identification of related variables that can be

used to predict value of the variable of interest.
Eg: Real estate prices are usually related to
property location and square footage
Crop yields are related to soil conditions,
amounts and timing of water and fetilizer
applications

3-13
 Associative Forecasting
 Predictor variables - used to predict values of
variable interest
 Regression - technique for developing an
equation for fitting a line to a set of points
 Least squares line - minimizes sum of
squared deviations around the line

3-14
 Simple Linear Regression
X Y Computed
7 15
relationship
2 10
6 13 50

4 15 40

14 25 30

15 27 20

16 24 10

0
12 20 0 5 10 15 20 25

14 27
20 44
15 34
7 17
A straight line is fitted to a set of sample points.

3-15
Linear Trend Equation

3-16
Simple Linear Regression

3-17
 Correlation Analysis
 Measures the strength and direction of
relationship between two variables
 Range = -1.00 to +1.00
 +1.00 indicates that changes in one variable
are always matched by changes in the other
 -1.00 indicates that increases in one variable
are matched by decreases in the other
 0 indicates little linear relationship between
two variables
3-18