Forecasting

Abstract
Forecast is a prediction, or estimate of some future activity,
event, or occurrence, forecasts are seldom perfect, but we
can consider that both product family and aggregated
product forecasts are more accurate than individual product
forecasts.
In general, forecasts are almost always wrong. So,
Why do we need to forecast?
Throughout the day we forecast very different things such
as weather, traffic, stock market, state of our company from
different perspectives.
Virtually every business attempt is based on forecasting.
Not all of them are derived from sophisticated methods.
However, “Best" educated guesses about future are more
valuable for purpose of Planning than no forecasts and
hence no planning.
Types of Forecasts:
- Economic forecasts:
o Predict a variety of economic indicators, like money
supply, inflation rates, interest rates, etc.
- Technological forecasts:
o Predict rates of technological progress and innovation.
- Demand forecasts:
o Predict the future demand for a company’s products or
services.

TYPES OF FORECASTING METHODS:

Qualitative methods: These types of forecasting methods are
based on judgments, opinions, intuition, emotions, or personal
experiences and are subjective in nature. They do not rely on any
rigorous mathematical computations.
Quantitative methods: These types of forecasting methods are
based on mathematical (quantitative) models and are objective in
nature. They rely heavily on mathematical computations.
A time series is the repeated observations of demand for a service
or product in their order of occurrence
•There are five basic time series patterns
Horizontal
Trend
Seasonal
Cyclical
Random

THE FORECASTING PROCESS

Predicting the future is the essence of forecasting. Estimating
when future events will occur, or the values of operating
characteristics or performance measures over some planning
horizon are representative outputs of the forecasting process.
Few individuals are able to develop accurate forecasts of the
future in a consistent manner without utilizing a systematic
procedure. A comprehensive forecasting process is shown in
Figure 1. (Figure 1 omitted) Engineering managers who engage in
this sequential procedure should achieve benefits associated with
increasingly effective decision making relative to their areas of
responsibility.
STEP 1. As is true with most management activities, it is critical to
begin with a specific statement of the purpose for the forecast.
Organizations use forecasts for a variety of purposes. For
example, forecasted annual revenues could be used by the
marketing manager to establish quotas for sales representatives
or by the engineering manager to make capacity decisions related
to anticipated staffing needs or production levels. While
appropriate as a motivational technique in marketing, the
optimistic orientation of an annual sales forecast might be totally
inappropriate for the development of a more realistic cost-
minimizing master production plan.
Most functional managers will want to develop their own set of
forecasts that relate to their needs and managerial style. Thus,
engineering managers should be prepared to modify existing
forecasts that have been developed elsewhere in the organization
in order to reflect their needs and aid in making decisions to
achieve their goals. Often, this modification process just requires
an adjustment for any biases inherent in the purpose of the
original forecast.
STEP 2. Collecting related historical data provides the opportunity
to examine similar situations from an experiential perspective.
Since the intent is to identify trends, seasons or cycles associated
with the past that could be projected into the future, historical
performance data should be purged of any one-time occurrences
that probably will not reoccur in the future. For example, if a
previous design effort required the staff to learn how to
effectively utilize newly purchased workstations, the man-hours
required for a similar design project should reflect this newly
acquired proficiency. Thus, it would be very appropriate to
exclude man-hours, which would reflect basic training and initial
skill development, from the historical database. …