BM STEEL MILL

Asad Azeem
BBA191004  Operation Management
 Chapter 2 Forecasting
Forecasting is the art and science of predicting future. It is the guess what’s going to
happen in future. Forecasting is the process of making predictions of the future based on
past and present data. This is most commonly by analysis of trends. A commonplace
example might be estimation of some variable of interest at some specified future date.
Prediction is a similar, but more general term. Both might refer to formal statistical
methods employing time series, cross-sectional or longitudinal data, or alternatively to less
formal judgmental methods. Usage can differ between areas of application: for example, in
hydrology, the terms “forecast” and “forecasting” are sometimes reserved for estimates of
values at certain specific future times, while the term “prediction” is used for more general
estimates, such as the number of times floods will occur over a long period. Risk and
uncertainty are central to forecasting and prediction; it is generally considered good
practice to indicate the degree of uncertainty attached to specific forecasts. In any case, the
data must be up to date for the forecast to be as accurate as possible. In some cases, the
data used to predict the variable of interest is itself forecasted.

FORECASTING TIME HORIZONS

1. Short-range forecast:
The time span of the short-range forecast is up to 1 year, but it is generally less than
3 months.it is used for planning purchasing, job scheduling, workforce levels, job
assignments, and production levels. Short range forecast is daily up to months in the
future. These short-range forecasts are used for operational decision making.
Usually, quantitative methods such as time series analysis are used in this time
frame.
2. Medium-range forecast:
Medium rang forecast is generally spans from 3 months to 3 years. It is useful in
sales planning, production planning and budgeting, cash budgeting, and analysis of
various operating plans.
3. Long-range forecast:
Long range forecast is generally for 3 years or more in time span. It used in planning
for new products, capital expenditures, facility location or expansion, and research
and development. Detailed knowledge about the products and markets are required
due to the high degree of uncertainty. This is commonly the case with new products
entering the market, emerging new technologies and opening new facilities. Often
no historical data is available.

TYPES OF FORECASTS
Organizations use three major types of forecasts in planning future operations:
1. Economic forecasts:
It addresses the business cycle by predicting inflation rates, money supplies, housing
starts, and other planning indicators.
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2. Technological forecasts:
It is concerned with rates of technological progress,
which can result in the birth of exciting new products,
requiring new plants and equipment.
BM Steel Mills:
In this manufacturing industry they are using the new technology named as the
follution plant which cost is 20 lacs in which the black polluted air is filtered, and
the white air is released just not to pollute the air. They are using different
equipment or machinery like oval machine, reduction or opinion gear and polish.
This machinery is used in manufacturing of the steel. And if one of the
machineries stop working, they have kept an extra machine so the work should
continue and if it is stopped then it should be stopped for maximum 3-4 hours.
3. Demand forecasts:

Projections of a company’s sales for each time period in the planning horizon.
Demand-driven forecasts drive a company’s production, capacity, and scheduling
systems and serve as inputs to financial, marketing, and personnel planning.

BM Steel Mills:
The demand forecast is that they produce 80 tons in 12hrs and max 18hrs and there
one day sale is 100 tons. And they know how much their demand is if the sale is
100 then they will produce 100 tons.

STRATEGIC IMPORTANCE

Following are the points of the strategic importance

Supply-Chain Management

Good supplier relations and the ensuing advantages in product innovation, cost, and
speed to market depend on accurate forecasts.

• BM Steel Mills:

The BM Steel Mills have their own mill from where they supply their raw material.
It is in Peshawar named as the Alfalah steel where they bought the raw material
named as the Farishi built and then the process it to make steel. There is no high cost
on it because they have their own supply chain.

Human Resources:

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The human resources the hiring of the employees, workers etc. should be according
to the demand of the customers. If there are excess of the workers and they are not
given the proper training, then the quality of the work is affected.
• BM Steel Mills:
The worker in the industry that were operational and are appointed were 120 worker
they were specialized in their respective work like loading. Foreman guides there
workers how to solve the problem.

They have appointed the labors through the contractors and if anyone of them is
missing and the work is stopped because of them then the contractor will be
answerable to the owner.

Department in the BM steel mills are sales, cutting, loading, finance, production and
the owner himself hires the employees there is HR department.

Capacity:

When capacity is inadequate, the resulting shortages can

lead to loss of customers and market share. Capacity is
that how much of the product your company or industry
can produced or manufacture.

• BM Steel Mills:

The stock capacity of the BM steel Mills is 500-600 tons and

their sale in 1 day production is 120 tons while their sale is
of 100 tons.

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SEVEN STEPS

Forecasting follows following seven basic steps:

1. Determine the use of the forecast

2. Select the items to be forecasted
3. the time horizon of the forecast
4. Select the forecasting mode.
5. Data gathered to make forecast.
6. Make the forecast.
7. Validate and implement the results

FORECASTING APPROACHES

There are two general approaches to forecasting

Quantitative forecasts:
They use a variety of mathematical models that rely on historical data variables to
forecast demand.
Subjective or Qualitative forecasts:
They incorporate such factors as the decision maker’s emotions, personal
experiences, and value system in reaching a forecast.
Some of the firms apply one of the methods either qualitative or the quantitative but
if both are used it will lead to the most effective work.

QUALITATIVE METHODS
Jury of executive opinion:
A forecasting technique that uses the opinion of a small group of high-level
managers to form a group estimate of demand.

Delphi method:
In a Delphi method only, the expertise is involved. In this method the involvement of
the expertise is necessary and if the executive is not involved it doesn’t matter.
There is one facilitator that takes the final decision.

Sales force composite:

A forecasting technique based on salespersons’ estimates of expected sales. It is a bottom to top
approach.

Market survey:

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A forecasting method that solicits input from customers or potential customers
regarding future purchasing plans.
BM Steel Mills:
The BM Steel mills uses the market survey and the sale approach. They produce the
product according to the customer demand and they use the just in time inventory.

QUANTITATIVE METHODS
There are Five quantitative forecasting methods, all of which use historical data.
Quantitative forecasting models are used to forecast future data as a function of past
data. They are appropriate to use when past numerical data is available and when it
is reasonable to assume that some of the patterns in the data are expected to
continue into the future. These methods are usually applied to short- or
intermediate-range decisions. Some examples of quantitative forecasting methods
are causal (econometric) forecasting methods, last period demand (naïve), simple
and weighted NPeriod moving averages and simple exponential smoothing, which
are categorizes as time-series methods. Quantitative forecasting models are often
judged against each other by comparing their accuracy performance measures.
Some of these measures include Mean Absolute Deviation (MAD), Mean Squared
Error (MSE), and Mean Absolute Percentage Error (MAPE).

Time-series models
Naive approach
Moving averages
Exponential smoothing
Trend projection
Associative model
Linear regression

TIME SERIES:

Time -series models predict on the assumption that the future is a function of the
past. Look at what has happened over a period and use a series of past data to make
a forecast. A time series is based on a sequence of evenly spaced weekly, monthly,
quarterly etc. data points. Forecasting time-series data implies that future values are
predicted only from past values and other variables, no matter how potentially
valuable, may be ignored.

TIME SERIES DECOMPOSITION

Analyzing time series means breaking down past data into components and then
projecting them forward. A time series has four components:

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Trend:
Trend is basically the gradual upward and downward movement of the data as the
time pass. It is influence or effected by the change in income, population or the
cultural etc.

Seasonality:
Seasonality repeats itself after the days, months, years or weeks. Like the
demand increases or decreases with the passage of time or the seasons changes
as the demand of the ice cream changes in winter as in summer the demand is
high.

BM Steel Mills:
Seasonality in the BM Steel mills can be explained as due to the rainy season the
transportation was closed, and the raw material was not bought from the Peshawar
and the customer order were also not delivered when the rained stopped the order
were loaded into the trucks and the normal operations were continued. So is this way
the seasonality can cause change in the demand.

Cycles:
Cycles are the patterns that repeat itself after some time. The cycles are usually tied
into the business cycle and are of major importance in short-term business analysis
and planning.

Random variations:
Random variations are “blips” in the data caused by chance and unusual situations.
They follow no discernible pattern, so they cannot be predicted.
NAIVE APPROACH
It is a forecasting technique that assumes that demand in the next period is equal to
demand in the most recent period.

BM Steel Mills:
The BM Steel Mills uses the naive approach that the know if there is sale is 100
tons then the next time the demand will be the same and if it exceeds, they will
increase their production according to that.