Forecasting

[ref. Chopra & Meindl pages 68 to 75]
Forecasting is a scientific method of determining

demand in future
 Starting point for all strategic planning

 Importance of strategy in spite of uncertainty in
future
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 Logistical areas of production scheduling,
inventory control, and aggregate planning need

demand forecast

1/26/2013

2

Some characteristics of forecasts Forecasts are almost always wrong Forecasts are more accurate for groups or families of items • motor cars and models Aggregate forecasts are more accurate • annual rainfall and daily rainfall 1/26/2013 3 .

Forecasts are more accurate for short periods (tomorrow. next year) Forecast should include an estimate of error Forecasts are no substitutes for facts 1/26/2013 4 .

Components of forecast  Past demand  Planned advertising or marketing efforts  Planned price discounts  State of economy  Competitors’ actions  forecaster’s knowledge and judgment 1/26/2013 5 .

Major categories of forecasts (forecasting methods) Qualitative & quantitative forecasts Qualitative forecasting • Forecast is based on personal judgment • Subjective (opinion based) • can be obtained in less time 1/26/2013 6 .

• When facts are unavailable for other methods • Made for specific items based on aggregate forecast for markets) 1/26/2013 7 .

Some qualitative methods of forecasting  Market surveys – potential customers’ opinions Delphi method Panel consensus  Life cycle analogy  Informed judgment – sales force 1/26/2013 8 .

Estimate these causal factors and forecast demand.Quantitative forecasting Fact based. Ambient temperature and coffee consumption! Monsoon and rice production! 1/26/2013 9 . scientific models Causal-Correlating demand to specific causal factors in environment.

Econometric models-statistical analysis of various sectors of economy Input-output models • Examine flow of products and services for markets and market segments • Generally used for project needs 1/26/2013 10 .

Regression analysis • Statistical method • Developing analytical relationship between two variables 1/26/2013 11 .Simulation – using computer simulation to simulate sectors of economy Time series 1.

under stable environmental situations and demand 2. 3 months or so 1/26/2013 12 .• Using statistical tools on past data to identify trend. Moving average method Simple moving average – estimator decides the period over which average is taken.

MONTHS JANUARY FEBRUARY MARCH APRIL ACTUAL 4200 4300 4350 - FORECAST 4283 1/26/2013 13 .

Weighted moving average MONTHS JANUARY FEBRUARY WEIGHTS 2 3 SALES 4200 4300 WEIGHTED SALES 8400 12.750 43050 Weighted forecast for April = 4305 1/26/2013 14 .900 MARCH TOTAL 5 10 4350 21.

Major factors that influence demand forecast: Demand and promotions -one product stealing demand of another product (tooth powder and tooth paste. motor car and motorbikes) 1/26/2013 15 .

Lead times -forecast methods need to be more accurate (sophisticated) if lead times are longer. If supply sources are available with short lead times. forecast methods need not be very accurate (sophisticated) 1/26/2013 16 . as forecasts tend to become weak for a long span of time.

different models of same product 1/26/2013 17 .Influence of product variants on each other is to be judged and if required joint forecast may be made Full shirts and half shirts. shirts and T-shirts.

Appropriate technique for forecast Take the dimensions of forecast into account to determine forecasting method. These dimensions are • geographical area • product groups • customer groups 1/26/2013 18 .

Take criteria into account • accuracy • time horizon • data availability • experience of the forecaster 1/26/2013 19 .

Establish performance and error measures to use forecast accurately:  Lead time as a performance measure.  Difference between forecast and actual should be measured for estimating error. Forecast accuracy is required to be highest at the end of this lead-time. 1/26/2013 20 .

Forecast Approaches Top-Down Approach (decomposition approach) • A national level forecast for SKU of company • performance pattern of locations in the past • forecast for various locations • demand is assumed to be uniform across the national market 1/26/2013 21 .

Bottom-Up Approach (decentralized approach) • Forecast for individual locations • Cumulative forecast for company at national level 1/26/2013 22 .

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