BERBER E EE Forecasting Planning is a fundamental activity of management. Forecasting forms the basis of planning. Be it planning for sales and marketing, or production planning or manpower planning, forecasts are extremely important. WHAT IS FORECASTING? Forecasting is a scientifically calculated guess. It is basic to all planning activity— (i) whether it is national, regional, organisational, or functional planning; and (ii) whether it is a long range plan or a short-range plan. “My salesman looks out of the window and gives me the sales forecast for the next year” said one senior manager. This salesman may be quite effective in his job, but he is only predicting and not forecasting. Forecasting is a little more scientific than looking into a crystal-ball. The scientific basis of forecasting lies in studying past, present and future trends, present and future actions and their effects. What happened in the past is relevant to what is happening now and what could happen in the future. Thus, forecasting takes into account all the three dimensions of time—past, present and future. In spite of all the calculations, forecasting remains a calculated guess. Errors are bound to be there, but it remains the foundation for management planning. One point needs a little emphasis. Many tend to think that forecasting is important only for marketing planning and not for production, because the figures for production planning are re- ceived from marketing planning anyway. This is an erroneous view. Production planning need not necessarily follow marketing planning. There are many situations where production planning and marketing planning have to be done together and many other situations where production plan- ning may be done separately from marketing planning. Therefore, forecasting is a very important activity for production planning, be it strategic or tactical. Ht ELEMENTS OF FORECASTING Forecasting consists basically of analysis of the following elements: (a) Past 1, Internal factors: (b) Present (c) Proposed or future8.2 Production and Operations Management 2. External factors: (i) Controllable (a) Past (b) Present (c) Future Gi) Non-controllable (a) Past (b) Present (c) Future Forecasting is essentially the study of internal and external forces that shape demand and sup. ply. The shape of the things to come will depend partially upon how one shapes the controllable factors. With different strategies, the forecasting will be different, offering multiple scenarios for management decision-making. METHODS OF FORECASTING Extrapolation ‘The easiest method of forecasting is that of extrapolation. If sales or production capacity needs in the past years have been 85, 90, 95 units, then in the coming year we could expect a sales/produc- tion capacity requirement of 100 units. This is very simple extrapolation and is illustrated in Fig. 8.1. 100 ee 95 90 Sales —~ 85 20 fie etapa el pt He oy et 2000 2001 2002 A Year—> Figure 8.1 Extrapolation If previous data is all linear, there is no problem in extrapolation. But if the previous data shows upward swings as well as downward swings then how is one to extrapolate? Many a time the upward and downward swings are quite random or one-time effects, For instance, in on particular year, a company may have received a substantial government order which may not be repeated again for many years to come. It is, therefore, better not to consider such one-time oF random phenomena for forecasting purposes. And that is why, an average taken over a number of past years or time periods is more reliable as a forecast for the future year, This is what is doneForecasting 8.3 in the averaging techniques, One can have a continuous average or an average only over a certain number of years or periods in time. Both ‘continuous’ and ‘discrete’ averaging methods are used, which we discuss below. Moving Averages Method ‘The moving average is a ‘discrete’ averaging method, where periods in the past beyond a certain number are considered irrelevant for the analysis. Suppose a company wants to use a 10-week moving average for forecasting sales of a particular item; they will add sales for the last 10 weeks and divide by 10 to get the average. A week later, they would add the newest weeks’ sales and discard the oldest, so that once again they have a current total of the past 10 weeks of sales. Again this needs to be divided by 10 to get the new moving average. This is illustrated in table 8.1. Table 8.1 Moving Averages Method Month Sales, units tt Me ie eaecaee January 50 February 40 March 90 ‘Total of 10 months April 45 = 540 units May 55 June 60 Forecast for November huly 55 =e est units 10 August 50 September 45 October 50, Ee | Novs ifthe observed sales for November happen tobe 60; 00 9 7771 OP ae “The forecast for December = ae 4 : Se Vesa = 5Sunits, vie ee ‘The message given by the moving averages technique is that, history helps to plan the future, but history beyond a certain time period in the past has very little influence on the future. The moving averages technique retires the old data and inducts fresh data into its calculation at every forecasting period. What we saw above was the case of a simple moving average, One could have also weighted moving averages, where different weights are given to the different periods of time in the past. For instance, a © Time inthe past Weightage’ BE 4 years ago 0.05 poe : _* Gyeatage os : oe ; % 2 years ago 03 a : Tlastyear OA = Note: Forecast is being made for the current year which is just beginning.8.4. Production and Operations Management In this case, the most recent data is considered to be more important than the past data and therefore, a heavy weightage is given to the more recent figures. Such a method could be suitable for certain businesses under certain conditions. Of course, much depends upon what the weight- age factors are and to how many years in the past the forecasting information extends. OTHER TIME-SERIES METHODS A modified version of the weighted moving average technique is the Exponential Smoothing Meth- od. The simplest way in which it could be expressed is as follows: Suppose we have an old forecast made for the present period as 100, the actual sales observed in the present period is let us say, 90. Then the new forecast (for the next period) by the exponential smoothing method is obtained by giving weightage to the old forecast and the actual sales. Let us say the weightage given to the current actual sales is 0.2 and the weightage given to the old forecast is 0.8, Now, the new forecast = (100 0.8) + (90 x 0.2) = 98 ‘The same can be expressed algebraically as follows: F,,,=0-D,+(1-0)-E, demand during the present period t; forecast of the demand made for the present period f; F,,, = forecast for the next period made during the present period. ‘@ = weightage factor for the current demand. “The advantage of this method over the moving average method is that, one needs to have only two figures: one for the old forecast and another for the actual sales observation. It is not necessary to store the data on a number of past periods. ‘Although, the method seems so simple, this technique takes into account the demands for all the past periods with exponentially decreasing weightages being given to each one of them. This can be seen if we try to expand the above given formula, as follows: F,,,= o-D,+(1-@) F, = a-D,+(1-@)[aD,_,+(1-a) F,,} =a-D,+a(1-o)D,_,+(1-0)'F, =a-D,+a(1 ~0)D,_,+(1- a) [a-D, ,+(1-@) F,,) =a-D,+a(1-@)D,,+@(1-a)?D,,+(1 -OyF, = @-D,+a(1-a)D,.,+a(1-a)D, +a(1—ayD,,+A(L- OND, y+ + (1- ayn, ene ‘The weightages for each of the demands in the past is discounted bya factor of (1 - @). The last term is negligible for a very large ‘In effect, exponential smoothing isa weighted average ofall the demands in the past, the weightages decreasing exponentially by the factor (1 - @). This is why itis called exponential smoothing, The smoothing part occurs because the one-time or random fluctuations in the demand are filtered out by taking an average over a long period of time.Forecasting 8.5 ‘The extent of smoothing, that is, the filtering-out process for random fluctuations, depends upon the alpha factor. When this factor is small, it leads to giving lower weightages to recent de- mands and more consideration to old demands. If alpha is large, the reverse is true. A proper study of tte ofa particular organisation would indicate as to what would be an appropriate value of alpha. ‘The point to be noted is that recent figures should definitely be considered for future forecast, but with a certain amount of scepticism or caution, What has been observed in the Jong past can- not be straightaway discarded in the light of the new data. Because, the new data may not yet have established its genuineness in terms of expressing real strong industrial or business trends. ‘There is an approximate relation of alpha factor (a) to the moving average which needs mention: 2 Alpha factor (a) = ———————___?>_____ (Number of periods in the moving average +1) An alpha factor of 0.1, for example, is roughly equivalent to a 19-period moying average, and alpha factor of 0.2 approximates a 9-period moving average. A sensible approach in choosing a value for the alpha factor is to pick one that approximates the number of periods in the moving average that makes sense. For an industry which is dynamic in its business (such as an industry which depends upon styles and fads of consumers) a low value of alpha factor such as 0.1 used to calculate a quarterly forecast would hardly seem to be appropriate; rather, an alpha factor of 0.3 with a smaller forecast-interval might prove to be more appropriate. The reverse is true for a more stable product. ‘The exponential smoothing as described above, is a simplistic model which smoothes the random fluctuations, but does not take into account the other factors such as seasonality of demand, the business cycles, and the complete consideration of the trends in the demand. The above model is, therefore, further refined for these components. Trend Correction ‘The correction to the trend component combined with the cyclical component is done as follows: 7.) = @(F,.7 F) + (1 - a (7) (-@) SP ii Fant gy Tt where 7, is the “trend factor” for the period f; RF, is the revised (i.e. corrected) forecast for the period f; F,is the uncorrected forecast for the period f; and @is the alpha factor, In addition to the above, the demand may have seasonal factors such as depicted in Fig. 8.2. Correction for Seasonality tes Seasonality may be due to various reasons such as company policies of the buyers, preferences of the consumers, government policies which may be periodic, and seasonal pattern due to the cli-8.6 Production and Operations Management mate. The corrections for such seasonal peaks and valleys in demand can be made by comparing these peaks/valleys with the general average demand during the non-seasonal periods. Compara- tive indices could be formulated for the seasons where the demand is over-shooting or under. shooting the average. The multiplication of the corresponding seasonal indices with the forecast average should give the forecast for the different seasonal periods. Often, when forecasts are made for the total demand during the next year, the demands in the various months are expressed seasonally in terms of the fractions of the annual demand observed generally. For instance, if the March and September demand is observed to be 0.25 fraction of the total annual demand, and the rest of the months are equally distributed in terms of the demand, the forecast for next year’s annual demand of one lakh items can be forecasted as 25,000 items each for the months of March and September and 5,000 items each for the rest of the months. Often sucha simple forecast serves adequately. But, sometimes a more rigorous forecasting model is necessary. In such cases we further correct our earlier exponential forecast model for seasonality. Demand > Time Figure 8.2 Demand with Seasonality and Overall Trend Procedure for Using Exponential Smoothing 1. The demand for the past year is noted, say in terms of monthly demands in the past year, 2. If-significant seasonal variation is observed, then a base series is formed. ‘This series could be the demand for the last year repeated verbatim, or if the seasonal periods themselves are slightly fluctuating, (say, if it is undecided as to whether the seasonal peak comes during February, March or April) a centred moving average is found forall the past data (with the number of periods being 3, in the case mentioned here), 3. After finding the base series, the ratio of the current months demand and the correspond ing base series demand is calculated. This is called the demand ratio, isForecasting 8.7 4. The demand ratio is now forecast for the next period. This forecast is called the forecast ratio. 5. A forecast for the next month’s demand ratio is made by noting the previous month's fore- cast ratio, the alpha factor and the current month’s demand ratio. This is similar to what we did earlier for non-seasonal data. The only difference is, here the data has been processed in terms of demand ratios—which need to be smoothened for the random component, and a trend component has to be incorporated. 6. The forecast ratio now is corrected for the trend component by first finding the trend factor from the previous observations of the demand ratio. So, the corrected forecast ratio for the next period (month) is given as follows: a 7. The corrected forecast ratio has now been rectified for any random component as well as for trend and cyclical factors. You may note that the seasonality has already been taken into account because of the ratio. Therefore, the next step is to get the forecast of the demand (not the demand ratio) by multiplying the forecasted demand ratio by the base series demand observed for the corresponding month. Table 8.2 gives an illustration of the calculations for a particular product. The demand history up to August 2009 is given. The forecast for the next period, i.e. September 2009 is made giving trend and seasonality corrections. LIMITATION OF TIME-SERIES METHOD Many more refinements are to be found in the research literature for the above-mentioned method. ‘They may be good for certain special situations, but for most situations, what we have covered here may be adequate. One needs to consider these models in terms of their relevance and peculiar drawbacks. The methods we have considered so far, viz. moving averages, exponential smooth- ing, etc. can be grouped under the category of time series models. In actuality, the demand may vary due to various market and other external and internal factors. The time-series models club together a whole lot of possibilities or reasons for variations in demand in terms of one factor, that is, time. This model rather than neglecting the total environmental multiplicity of factors, has rather implicitly considered these factors. The drawback however, is that the various influencing factors have not been explicitly considered. Anything implicitly assumed may result in a simplistic averaging procedure. The same drawback can, however, be an advantage for these models, because with a simple past history of the demand and seasonal and other corrections made, the necessity to consider each and every environmental factor is obviated. After making the forecast, it needs to be monitored for errors or deviations from the actuals. observed, This is necessary in order to make any modifications in the originally assumed forecast- ing model. There are two measures of deviations.2x “St G00 s9qUINd Ag 10) PUBLIOP Jo 883910} UL, : HON. 8.8 Production and Operations Management sun ovr" OFFe wae nem iota a L661 Ozz'T 400'0 > 6e7'T S8t'T 91 ane SRLS es ee SPOT So 1000 PEPE OPe ge f BPC Eh Wits Tel se7'l £00°0 + 6S7'T POET I Sie RAS eT Get SIC Le OE ee 8661 Orel F100 + £271 £971 st FT'st Steet ‘€70°0+, I8tT. Leet £1 is Tse S6eT FOO + tOET OFT or 5 TSE Tsay SCO OE ONT: OOP Te OTT EY, “ef 600e # ae % “Ayoansodeor 0€0'0 4 Pu OT 194 OV Wade) Bre 10}>e pus, ES UB oTney Ise29x04 Fo FONE GOO AqUIRDA st ae ESRD SEE 2 cd = = £ ie aon PAS Peres cRlS ol am i ae ; he @ Z 9 ¢ P € z FED (puowoa, a (C'puouuac souas 250g) 2 oa* 160-1) + tba “yao 1) +. UBS 28047 xO umy)ad d=!te ya Cuda" yg Buppuodsestoa) | souag puvuiog yuo (puniiag = UG og pauias9o iv av9x (aa) puouiag ay (LI) HY sossvq purse (aI) OPTI, powuasao) forsvaasog pours 18032404 posta (QA) ony puDLULDET J juno2ov our sx0y2v4 [eUOSwag pute [eoyPodo ‘pu, MHopULy SuPAE) puCtIdG Jo eER ZB BIG *£°0 3q 0) pauinsseForecasting 8.9 FORECAST ERROR MONITORING. Mean Absolute Deviation (MAD) ‘Absolute’ here means that the plus or minus signs are ignored; and ‘deviation’ refers to the differ- ence between the forecast and the actuals. See Table 8.3. Table 8.3. Mean Absolute Deviation (MAD) “Actual Demand Deviation ~__ (observed units) Ree 1000 - 100 Seet100 Se s 1000 7960" SERS oA -15 Running Sum of Forecast Errors (RSFE) ‘This is the algebraic sum of the forecasting errors, which means the negative and positive signs are given their due significance. Table 8.4 illustrates this, Table 8.4 Running Sum of Forecast Errors (RSFE) Another entity called “tracking signal” is defined as follows: RSFE Tracking signal = ——— acking'signal =) ( In the above case, tracking signForecasting 8.17 vr Now, with the gradual opening up of the economy, the economic scenario has changed due to the increasing participation of the multinational corporations in various areas of business/indus- try, including infrastructure. The Indian economy is increasingly getting the characteristics of a buyer’s market. The Indian businessman, therefore, has to be very alert about the rumblings in the gangways. Forecasting models, such as the causal models can now be used to forecast the effect of concessions in corporate tax, customs duty, excise, and other areas. Opinion-based methods such as Delphi techniques and consumer behavioural surveys have increasing relevance. Monopoly or oligopoly does not need forecasts; it is the competition that needs the forecasts. Indian industries and businesses are waking up to the fact that it is now a different game. They know that if they do not follow appropriate management basics such as forecasting, they risk the danger of being marginalised for a long time to come. f ## SOLVED PROBLEMS 1. Sales of Super Cool brand of motorbikes are being analysed. The monthly sales figures for the previous year are furnished below. TTS [Monti No Sold (in "00) 8 2 5 3 9 4 i s 13 6 13 7 10 8 i 9 14 10 ieee i 16 12 Tee 18 4 (a) Get a3-month moving average for the various months of the year. (b). Get a 3-month weighted moving average with weights of: Current month: 0.5 Previous month: 0.3, and Previous to previous month: 0.2 : (©) Which method seems givea better fit? You may base your reply upon MAD calculations. HE Answer Sample calculations for the 3-month moving average are given below. Moving average forecast for month 4 = (8+5+9) / 3 = 7.33 Moving average forecast for month 5 = (5+9+11)/3 = 8:33 In the same manner we, now, get the entire moving averages forecast.‘Month 3-Month Moving “Averages Forecast’ 4 7.33 5 8.33 6 10.00 7 12.33 8 12.00 9 1 10 ih 12 15.00 Sample calculations for the 3-month weighted moving average are given below. Forecast for month 4 = (9 x 0.5 + 5X 0.3 + 8 X 0.2) = 7. Forecast for month 5 = (11 x 0.5 + 9x 0.3 + 50.2) =9.2 In the same manner we, now, get the entire weighted moving averages forecast. ‘Month S-Monih Weighted ‘Moving Averages Forecast (c) Compare the forecasts with the actual sales. On a cursory examination, the weighted moving average seems to give a better fit than the simple moving average. However, as suggested in this problem, let us compute the MAD. Month ‘Actual Demand. Siniple MAvg Forecast" Deviation" Welghited MAvg Forecasl. Deviation. 4 L 7.33 ~4.67 76 aa is ee 8.33 i =4.67 7D. Ee 6 13 10.00 =3.00 116 BLA & 10 12.33, 4233, 126 ae 8 MW 12.00 +1.00 1s a5 9 ge Na ats; Lae ry 10 15 11.67 vie. 18 moa ELLE a lois 13.33 OT eS 0. ay 12 18 15.00. 3.00 153 27 Total of Absolute Deviation: 27.38 a ‘Mean Absolute Deviation (MAD): 27.34 / 9 = 3.038 MAD = 21.0/9 = 2.333,‘The MAD for the Weighted Moving Averages is smaller than that for the Simple Moving Averages. Hence, the former model, viz, Welghted Moving Averages, seems to be giving a better fit of the two. stomer footfalls in ‘Carnival’ shopping mall are being analysed. the data for the last few. re given in the table below. [Week No. Number of Footfale (in 00). 7 150 8 145 ‘Test the following forecast models for their performance. : (a) Exponential smoothing with a= 0.4. Start with the forecast for week 1 at 8000 foot- falls. (b) 4-week simple moving average. EE Answer (a) Forecasts with the Exponential Smoothing model are made using the formula: F,, = oD, +(1~ ODF, Calculations are’as follows. Forecast for week 2 = (a)(Actual Footfalls for week 1) + (1 - @)(Forecast for week 1) . Forecast for week 2 = (0.4)(85) + (1 - 0.4)(80) = 82 Similarly: Forecast for week 3 = (a) (Actual Footfalls for week 2) + (1 - @)(Forecast for week 2) Forecast for week 3 = (0,4)(95) + (1 - 0.4)(82) = 87.2 Forecast for week 4 = (0.4)(110) + (1 - 0.4)(87.2) = 96.3 Forecast for week 5 = (0.4)(100) + (I~ 0.4)(96.3) = 97.8, Forecast for week 6 ='(0.4)(115) + (1 0.4)(97.8) = 104.7 Forecast for week 7 = (0.4)(130) + (1 ~ 0.4)(104.7) = 114.8 Forecast for week 8 = (0.4)(150) + (1 ~ 0.4)(114.8) = 128.9 (b) Forecasts made with 4-month simple moving average are as follows. Forecast for week 5 = (Total of actual footfalls for weeks'1,2, 3 and 4) /(4) =(85 +95 + 110 + 100) / (4) = 97.5 Forecast for week 6 = (‘Total of actual footfalls for weeks 2,3, 4 and 5) /(4)8.20 Production and Operations Management = (95 +110 + 100 + 115) / (4) = 105.0 Forecast for week 7 = (Total of actual footfalls for weeks 3, 4,5 and 6) /(4) = 110 + 100 + 115 + 130) / (4) = 113.8 Forecast for week 8 = (Total of actual footfalls for weeks 4, 5, =(100 + 115 + 130 + 150) / (4) = 123.8 6 and 7) /(4) Following table has arranged all the above results. “Week No. Actual Footfalls’ Exp. Simooth. Deviation. mon Mov. Avg. Devn. } (00) Forecast (00). Forecast (00) (00) Serna (00): 4 1 85 80 starting -5.0 2 95 82 -13.0 = 110 87.2 -28.8 4 100 963 37 5 115 97.8 17.2 97.5 -17.5 6 130 104.7 25.3 105.0 -25.0 a: 150 114.8 -35.2 113.8 -36.2 8 145 128.9 216.1 123.8 =212 Total Absolute Deviation from week 5 to 8*: 93.8 999 ‘Mean Absolute Deviation (MAD) = 23.45 24.98 + ‘The two models are compared only for the weeks on which we have both the forecasts. These figures are shown in bold. It is interesting to note that both the forecasting models seem to be giving results close to each other. This should be expected because an approximate relation was mentioned in this chapter earlier. y Accordingly, a= (2) / (No. of periods in the moving average + 1) = (2)/(441)=04 ‘The present example seems to verify that relation well. So far, both the forecasts appear to be lagging behind the actual footfalls significantly. ‘There seems to bea heavy trend in the number of footfalls. An exponential smoothing model with trend correction might do a better job. Sadia Syed has come up with the following forecasting model for the number of admissions to her alma mater Barkat School of Business in Lucknow: Z = 290 + [360(¥ /100)° / {1 + log,,(C)} ] Where Z= number of new students getting admitted ercentage of graduating students placed in the current year umber of business schools in the cityForecasting 8.24 (a) What will be Sadia’s forecast for admissions this year if 90 per cent of the graduating students have been placed and the business schools in the city number 11? (b) What will it be if only 40 per cent have been placed and the business schools in the city are 23? (c) What will it be if the placements are 100 per cent and the number of business schools in the city are 30? (d)_ What may be the maximum possible number of students getting admitted to Sadia’s alma mater, as long as this forecast model holds good? = Answer (a) Z=190 + [360(0.90)°S /(1 + log,,11)] = 190 + [341 / (1 + 1.0414)] = 190 + 162 = 352 (b)_ Z=190 + [360(0.40)°* /(1 + log,,23)] = 190 + [227 / (1 + 1.3617)] = 190 + 96 = 286 (©) Z=190 + [360(1.00)°* /(1 + log,,30)] = 190 + [360 / (1 + 1.4771)] = 190 + 145 = 335 (d) Maximum number of students will be possible when the placements are 100 per cent and Barkat Business School is the only business school in the city (ie. number of business schools in the city is 1). Hence, — Z= 190 + [360(1.00)°* /(1 + log,,1)] = 190 + [360 / (1 + 0.0000)] = 190 + 360 = 550. 4. Jaipur Cements Limited has observed that the demand for cement typically shows quarterly seasonal variations, while the total annual demand appears to be rather steady. The data regarding quarterly demand (expressed in thousand tons) for the past two years is as fol- lows. ear 1 46 28 37 55 2 42 30. 43 57. sd (a) Find the seasonal indices for each of the quarter. (b) If the total demand in Year 3 is forecasted to be 200,000 tons, what may be the ex~ pected demand for Quarter 2 of year 32 #E Answer When one uses Seasonality Indices, one is generally using a Decomposition Method to forecast demand, The underlying premise is that the demand can be separately and dis- tinctly broken down into its components, viz. trend, cycle, seasonality and randomness. ‘The demand is usually considered as a product of these components. D=TXCXSxR8.22 @) (b) Production and Operations Management ‘; ci ity as an index Wheie, D = Deiid 7e trend value, Celia factor $= seasonally 45 md R= randomness as an index i (n tfte proses 5 aa mentioned in the present When periodic seasonality isthe only distinguishing, fieton ae men Te ave te example, the seasonality index when multiplied by the averaet 3 forecast corrected for seasonality. Use of Average Percentage Method of finding seas iMlustration on the present example, ; Step 1: Find the average quarterly demand for each of the years. ‘These ave: Year 1: (464 28 4374 55)/4 © 41.5 (42 +30 4-43 457) 4 43,0 Bea oe livide the demand during a quarter by the average quarterly demand 6 the result as a percentage. sonal indices will be Mustrated, basing the for that For example: Quarter Lof Year 1:46 /41,5 = 1.1084 = 110.8 percent t Quarter 2 of Year 1:28 / 41,5 = 0.6747 = 67.5 per cent i milar computations are made for the other quarters and the following, table is the result ‘The table also shows the mean values of the percentages for each quarter over the given two years (eg. for Quarter 1 of the two years, the percentages are 110.8 and 97.7 giving a mean of 104,25 or 104.3 for a single decimal precision), Year Quarter 1 Quarter2—_ Quarter 3 1 110.8 O78 Mean 10 ‘The total of mean values 405, then multiplied by (400/405). Each of the mean values, in the above table, isthe seasonality index for the corresponding quarter. ‘This is shown below. n the above table) is adding to 400 exactly. ‘This is good. Had it ly mean value would have had to be given a correction i.e. | Quarter Seasonality | Tepe rien (oes 1 104.3 2 CIs aso Bi MS annual demai ‘ Teel cald neve eaan Tee 748200. 1f'there was no seasonality, the quarter ‘This average quarterly demand of 50 has to be given seasonal “4 Forecast for a. quarter = (average quarterly demand) x (Seasonal tndexton sere ) Computations: -x for that quarter / 100) For Quarter 1 of Year 3 the corrected forecast (50) x (10. For Quarter 2 of Year 3 the corrected forecast = (104.3 1100) 21 (50) x (68, i For Quarter 3 of Year 3 the corrected forecast = (50) x ‘s z Hae = 34.4 a = 47,2Forecasting 8.93 For Quarter 4 of Year 3 the corrected forecast = (50) x (132.5 /100) = 66.3 As per above computation, the demand forecast for Quarter 2 of Year 3 is 34400 tons. Alternatively, one could have used the Centered Moving Averages method of finding sea- sonal indices. Readers may find a description of it in other books. (Refer to Bibliography.) 5. Indian Banking Software Ltd, shows the following revenues in Dubai during different quar- ters. “Year Quarter Revenue (in million Dirham) 50 30. 40 60. 55 35, 45 ¥ 4 70 Forecast the revenues for Quarter 1 of Year 2 (QUY2) through Quarter 1 of Year 3 (QUY3) using a trend and seasonality adjusted exponential smoothing model. For the Quarter 4 of Year 1 (Q4Y1), take the initial forecast of revenue at 60 (million Dirham), a forecast ratio of 1.00 and an initial trend of zero. Use the smoothing constant a of 0.2 for both the demand and the trend factor. wfolefelefole EE Answer ‘Arrange the quarterly values of Y1 as the Base Series which is used in finding the ‘demand ratio. The ‘forecast ratios’ follow from there. Computations of the values of demand ratio (ie. observed revenue divided by the corresponding base series figure) for the period ‘ (D)), forecast ratio for the next period (FR,,,) calculated in period ‘f, trend factor for the next period (T,,,) calculated in period ‘t, revised forecast ratio for the next period (RER,,,) calculated in period 4 ?, and the final forecast for revenue in period ‘t+’ are furnished below. Thus, we obtain the forecasts with trend and seasonality incorporated into them. For Q4Y1 (henceforth abbreviated as 4: Demand ratio (DR,,) = 60/60 = 1.00, FR,, = 1.00 and T,, = 0.00. We start the forecasting procedure with these values, Hence, RFR,, = FR,, + T,, {1 = 0) (@) = 1.00 (08/02) (0.00) = ‘ Hence, the forecast. of revenue for the next period: For QUY2: DR,, = 55/50= 1.10 FR, = @(D,,) + (1 ~ @)( BR,,) = 0.2(1.10) + 0.8(1.00) = 1.02 Hence, T,, = @(FR,, = FR,, ) + (1 = a), = 0,2(1,02 -1,00) + 0.8(0.00) = 0.004 Hence, RER,, = FR,, + T,, (1 - a) / (a) = 1.02 + (0.8/0.2) (0.004) = 1.0368.24 Production and Operations Management Hence, the forecast of revenue for the next period: ED,, = (30)(1.036) = For Q2Y2: DR,, = 35 / 30 = 1.167 FR, = @(D,,) + (= @)( FR,, ) = 0.2(1.167) + 0.8(1.02) = 1.049 Hence, T,, = @ (FR, ~ FR,,) + (1 - a)T,, = 0.2(1.049 -1.020) + 0.8(0.004) =0.0092 Hence, RFR,, = FR,, +,, (1 - @) / (a) = 1,049 + (0.8/0.2) (0.0092) = 1.0868 Hence, the forecast of revenue for the next period is: FD,, = (40)(1.0868) = 43.47 For Q3Y2: DR,, = 45/40 = 1.125 FR, = (D,,) + (1 - @)( FR, ) = 0.2(1.125) + 0.8(1.049) = 1.065 Hence, T,, = @ (PR, ~ FR,, ) + (1 - @)T,, = 0.2(1.065 -1.049) + 0.8(0.0092) = 0.01036 Hence, RFR,, = FR,, + Ty (1 - a) / (a) = 1.065 + (0.8/0.2)(0.01036) = 1.1065 Hence, the forecast of revenue for the next period: FD,, = (60)(1.1065) = 66.39 For Q4Y2: DR,, = 70/ 60 = 1.1667 FR,, = & (D,,) + (1 - 0)( ER, ) = 0.2(1.1667) + 0.8(1.065) = 1.0853 Hence, T,, = (FR,, - FR,,) + (1 - @)T,, = 0.2(1.0853 -1.065) + 0.8(0.01036) = 0.00829" Hence, RFR,, = FR,, + T,, (1 - @) / (@) = 1.0853 + (0.8/0.2)(0.00829) = 1.11846 Hence, the forecast of revenue for the next period: FD, , = (50)(1.11846) = 55,92 ‘The above results are expressed in the following table. (Period) ~ Observed’ Base) DR, FR,, RFR _ Revenue "Revenue é ‘ Fae uae Q4yl 60 1.000 1,000 0.000. 1.0000 Quy? 55 BO OOS 251.020 5250.04 et opeg ea Q2y2 35 30 1.167 1.050 0.0092 1.0868 31.08 Oy2 ABS MO ANOS 1065 Toots ase a Qay2 70 60 __1.1667__ 11085 0.01235 111846 66.39 ones ee AeeeS5 Gd srt (Note:The observed, bse series and forecasted revenues ae in Million Dishamny