Forecasting

1C H A P T E R
11 Introduction to Operations
Management
12 Competitiveness, Strategy,
and Productivity
3 Forecasting
4 Product and Service Design
15 Strategic Capacity Planning
for Products and Services
16 Process Selection and
Facility Layout
7 Work Design and Measurement
8 Location Planning and nalysis
9 Management of !uality
10 !uality Control
11 ggregate Planning and
Master Sc"eduling
12 M#P and $#P
13 Inventory Management
14 %I& and Lean Operations
15 Supply C"ain Management
16 Sc"eduling
17 Pro'ect Management
18 Management of Waiting Lines
19 Linear Programming
CHAPTE
R
OUTLINE
Introducti
on, ()
Features
Common
to ll
Forecast
s, (*
$lements
of a
+ood
Forecast,
(,
Forecasti
ng and
t"e
Supply
C"ain (,
Steps in
t"e
Forecastin
g Process,
((
Forecast
ccuracy,
((
Summari
-ing
Forecast
ccuracy
, (.
pproac"
es to
Forecasti
ng, ./
!ualitativ
e
Forecasts
./
$0ecuti
ve
Opinion
s, ./
Salesfo
rce
Opinion
s, .1
Consu
mer
Survey
s, .1
Ot"er
pproa
c"es,
.1
Forecasts
2ased on
&ime3Series
Data, .4
5aive
Met"od
s, .4
&ec"ni6
ues for
veragi
ng, .7
Ot"er
Foreca
sting
Met"od
s, .8
LEARNI
NG
OBEC
TI!E"
A
f
t
e
r
c
o
m
p
l
e
t
i
n
g

t
h
i
s

c
h
a
p
t
e
r
y
ou
sho
uld
be
abl
e
to:
# List t"e
elements of a
good forecast9
12 Outli
ne
t"e
steps
in
t"e
forec
astin
g
proc
ess9
13 $valuate
at least
t"ree
6ualitative
fore3
casting
tec"ni6ues
and t"e
advantage
s and
disadvanta
ges of
eac"9
14 Compare
and
contrast
6ualitative
and
6uantitativ
e
approac"e
s to
forecasting
9
&ec"ni6ues for &rend, .8
&rend3d'usted $0ponential Smoot"ing,
84
&ec"ni6ues for Seasonality, 87
&ec"ni6ues for Cycles, 8.
ssociative Forecasting &ec"ni6ues,
8.
Simple Linear #egression, 8.
Comments on t"e :se of Linear
#egression nalysis, 1/4
5onlinear and Multiple
#egression
nalysis, 1/7
Monitoring t"e Forecast, 1/7
C"oosing a Forecasting &ec"ni6ue,
1/(
:sing Forecast Information,
1/8
Computer Soft;are in Forecasting,
1/8
Operations Strategy, 1/8
Cases$ M<L Manufacturing,
17/
=ig"line Financial
Ser
vic
es,
Ltd
9,
17
/
15 Descri>
e
averagi
ng
tec"ni6u
es,
trend
and
seasona
l
tec"ni6u
es, and
regressi
on
analysis
, and
solve
typical
pro>lem
s9
16 $
0
p
l
a
i
n
t
"
r
e
e
m
e
a
s
u
r
e
s
o
f
f
o
r
e
c
a
s
t
acc
ura
cy9
17 Comp
are
t;o
;ays
of
evalua
ting
and
control
ling
foreca
sts9
18 ssess
t"e ma'or
factors
and
trade3offs
to
consider
;"en
c"oosing
a
forecasti
ng
tec"ni6u
e9
Weat"er forecasts are one of t"e many types of forecasts used >y some >usiness organi-ations9 lt"oug"
some >usinesses simply rely on pu>licly availa>le ;eat"er forecasts, ot"ers turn to firms t"at speciali-e in
;eat"er3related forecasts9 For e0ample, =ome Depot, +ap, and %CPenney use suc" firms to "elp t"em take
;eat"er factors into account for estimating demand9
Many ne; car >uyers "ave a t"ing or t;o in common9 Once t"ey make t"e decision to >uy a ne; car, t"ey ;ant it as
soon as possi>le9 &"ey usually don?t ;ant to order it and t"en "ave to ;ait si0 ;eeks or more for delivery9 If t"e car dealer
t"ey visit doesn?t "ave t"e car t"ey ;ant, t"ey?ll look else;"ere9 =ence, it is important for a dealer to anticipate >uyer ;ants
and to "ave t"ose models, ;it" t"e necessary options, in stock9 &"e dealer ;"o can correctly forecast >uyer ;ants, and
"ave t"ose cars availa>le, is going to >e muc" more successful t"an a competitor ;"o guesses instead of forecasting@and
guesses ;rong@and gets stuck ;it" cars customers don?t ;ant9 So "o; does t"e dealer kno; "o; many cars of eac" type
to stockA &"e ans;er is, t"e dealer doesnt kno; for sure, >ut >y analy-ing previous >uying patterns, and per"aps making
allo;ances for current conditions, t"e dealer can come up ;it" a reasona>le approximation of ;"at >uyers ;ill ;ant9
Planning is an integral part of a manager?s 'o>9 If uncertainties cloud t"e planning "ori-on, managers ;ill find it difficult to
plan effectively9 Forecasts "elp managers >y reducing some of t"e uncertainty, t"ere>y ena>ling t"em to develop more
meaningful plans9 forecast is a statement a>out t"e future value of a varia>le suc" as demand9 &"at is, forecasts are pre3
dictions a>out t"e future9 &"e >etter t"ose predictions, t"e more informed decisions can >e9 Some forecasts are long range,
covering several years or more9 Long3range forecasts are especially important for decisions t"at ;ill "ave long3term conse3
6uences for an organi-ation or for a to;n, city, country, state, or nation9 One e0ample is deciding on t"e rig"t capacity for a
planned po;er plant t"at ;ill operate for t"e ne0t 4/ years9 Ot"er forecasts are used to determine if t"ere is a profit
potential for a ne; service or a ne; productB Will t"ere >e sufficient demand to make t"e innovation ;ort";"ileA Many
forecasts are s"ort term, covering a day or ;eek9 &"ey are especially "elpful in planning and sc"eduling day3to3day
operations9 &"is c"ap3ter provides a survey of >usiness forecasting9 It descri>es t"e elements of good forecasts, t"e
necessary steps in preparing a forecast, >asic forecasting tec"ni6ues, and "o; to monitor a forecast9
73
74 C%a&ter T%ree Forecasting
INTRO'UCTION
Forecast statement
a>out t"e future
value of a varia>le of
interest9
Forecast
s are a
>asic
input in
t"e
decision
process
es of
operatio
ns
manage
ment
>ecaus
e t"ey
provide
informat
ion on
future
demand
9 &"e
importa
nce of
forecast
ing to
operatio
ns
manage
3ment
cannot
>e
overstat
ed9 &"e
primary
goal of
operatio
ns
manage
ment is
to
matc"
supply
to
demand
9 =aving
a
forecast
of
demand
is
essentia
l for
determi
ning "o; muc" capacity or
supply ;ill >e needed to meet
demand9 For instance,
operations needs to kno; ;"at
capacity ;ill >e needed to
make staffing and e6uipment
decisions, >udgets must >e
prepared, purc"asing needs
information for ordering from
suppliers, and supply c"ain
partners need to make t"eir
plans9
&;o aspects of forecasts
are important9 One is t"e
e0pected level of demandC
t"e ot"er is t"e degree of
accuracy t"at can >e
assigned to a forecast Di9e9,
t"e potential si-e of forecast
errorE9 &"e e0pected level of
demand can >e a function of
some structural variation,
suc" as a trend or seasonal
variation9 Forecast accuracy
is a function of t"e a>ility of
forecasters to cor3rectly
model demand, random
variation, and sometimes
unforeseen events9
Forecasts are made ;it"
reference to a specific time
"ori-on9 &"e time "ori-on may
>e fairly s"ort De9g9, an "our,
day, ;eek, or mont"E, or
some;"at longer De9g9, t"e ne0t
si0 mont"s, t"e ne0t year, t"e
ne0t five years, or t"e life of a
product or serviceE9 S"ort3term
forecasts pertain to ongoing
operations9 Long3range
forecasts can >e an important
strategic planning tool9 Long3
term forecasts pertain to ne;
products or services, ne;
e6uipment, ne; facilities, or
somet"ing else t"at ;ill re6uire
a some;"at long lead time to
develop, construct, or
ot"er;ise implement9
Forecasts are t"e >asis for
>udgeting, planning capacity,
sales, production and
inventory, personnel,
purc"asing, and
more9 Forecasts play
an important role in
t"e planning process
>ecause t"ey ena>le
managers to
anticipate t"e future
so t"ey can plan
accordingly9
Forecasts affect
decisions and
activities
t"roug
"out
an
organi
-ation,
in
accou
nting,
financ
e,
"uman
resour
ces,
marketing, and
management information
systems DMISE, as ;ell as
in oper3ations and ot"er
parts of an organi-ation9
=ere are some e0amples
of uses of forecasts in
>usiness organi-ationsB
Accounting. 5e;
productFprocess cost
estimates, profit
pro'ections, cas"
management9
Finance.
$6uipmentFe6uipme
nt replacement
needs, timing and
amount of fundingF
>orro;ing needs9
T
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T%an( )o* +or e,a-*ating

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