FORECASTING AND

AGGREGATE PLANNING
CHAPTER 4

PREPARED BY:
NORLELA BINTI ZAMAN
COMMERCE DEPARTMENT , POLITEKNIK SULTAN SALAHUDDIN ABDUL AZIZ SHAH
LEARNING OBJECTIVE
At the end of this topic, students should be able to:
4.1 Interpret the forecasting in operation planning (CLO2,CLO3)
4.1.1 Define forecasting in operation planning
4.1.2 Explain the strategic importance of forecasting
4.2 Determine qualitative decision making approaches
4.2.1 Describe Jury of Executive Opinion
4.2.2.Explain Delphi method
4.2.3 Discuss Sales force Composite
4.2.4 Explain Consumer market surye
4.3 Analyze quantitative approaches (CLO2, CLO3)
The main objective of this chapter is to
4.3.1 Explain Naïve approach
interpret the forecasting in operation planning
and analyze quantitative approaches
4.3.2 Calculate Moving average
4.3.3 Compute Exponential Smoothing
4.3.4 Calculate Trend projection
TEACHING &
LEARNING ASSESSMENT TASK
4.4 Determine the aggregate planning in operation
ACTIVITIES
4.4.1 Define aggregate planning in operation TEST
4.4.2 Discuss the concept of aggregate planning in operations Tutorial and past
exam exerise
4.4.3 Explain the aggregate planning strategies
 Forecasting
“Prediction is very difficult,
especially if it's about the future.”
Nils Bohr
INTRODUCTION

■ An essential aspect of managing any organization is planning for

the future

■ The success of a business organization largely depends upon

how its manager foresees the future and consequently develop
appropriate strategies.

■ Poor forecasts may incur increased costs for the firm.

WHAT IS FORECASTING?
 Process of predicting a future
event based on historical data
 Educated Guessing
 Underlying basis of
all business decisions
• Production
• Inventory
• Personnel
• Facilities
WHAT IS FORECASTING?
■ Forecasting is a method used to predict and place all
information mainly in design and operating systems.
■ They both estimate what that information will look like in the
future. In order to do so, one must determine the purpose,
establish a time horizon, select a forecasting technique, make
it, and then monitor the new forecast.
■ Forecasting helps managers and businesses develop
meaningful plans and reduce uncertainty of events in the
future. Managers want to match supply with demand;
therefore, it is essential for them to forecast how much space
they need for supply to each demand.
What is forecasting?

Forecasting is a tool used for predicting

future demand based on
past demand information.
EXAMPLES
 Sales manager forecasts the expected demand in the next
period (day, week, month, quarter of year)

 Production manager has to forecast how many units of a

product are to be produced in the next period.

 Finance Minister has to forecast government’s revenue in

the next financial year before presenting the budget.

 Meteorologist forecast regarding the weather for the next

day.
 Types of forecasting methods

Qualitative methods Quantitative methods

Rely on subjective opinions from Rely on data and analytical

one or more experts. techniques.
 Types of Forecasting Methods
■ Forecasting methods are classified into two groups:
 USERS OF FORECASTS
Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Key issues in forecasting

1. A forecast is only as good as the information included in the

forecast (past data)
2. History is not a perfect predictor of the future (i.e.: there is
no such thing as a perfect forecast)

REMEMBER: Forecasting is based on the assumption

that the past predicts the future! When forecasting,
think carefully whether or not the past is strongly
related to what you expect to see in the future…
IMPORTANCE OF FORECASTING IN OM
Departments throughout the organization depend on
forecasts to formulate and execute their plans.

Finance needs forecasts to project cash flows and

capital requirements.

Human resources need forecasts to anticipate hiring

needs.

Production needs forecasts to plan production

levels, workforce, material requirements,
inventories, etc.
IMPORTANCE OF FORECASTING IN OM

Demand is not the only variable of interest to

forecasters.

Manufacturers also forecast worker

absenteeism, machine availability, material
costs, transportation and production lead
times, etc.

Besides demand, service providers are also

interested in forecasts of population, of other
demographic variables, of weather, etc.
Types of Forecasts by Time Horizon
■ Short-range forecast Quantitative
methods
– Usually < 3 months
■ Job scheduling, worker assignments
■ Medium-range forecast Detailed
use of
– 3 months to 2 years
system
■ Sales/production planning
■ Long-range forecast
– > 2 years
■ New product planning

Design
of system
Qualitative
Methods
FORECASTING METHODS
Forecasting

Qualitative
Quantitative

• Naïve •Delphi method

• Simple moving average •Jury of executive opinion
• Weighted moving average •Consumer Market Survey
• Trend projection •Sales Force Composite
- Exponential smoothing
- regression
-correlation
 Qualitative Method Or Collective :
Jury of executive opinion :
*The opinions of a small group of high-level
managers are pooled and together they estimate
demand. The group uses their managerial
experience, and in some cases, combines the
results of statistical models.
*The opinions of a group of high-level managers,
often in combination with statistical models, are
pooled to arrive at a group estimate of demand.
Delphi method
There are three different types of participants in Delphi
method; decision makers, staff personnel and
respondents. Decison makers : consist of a group of 5 to
10 experts who will be making the actual forecast. Staff
personnel : assist decision makers by preparing,
distributing, collecting and summarizing a series of
questionnaires and survey results. The respondents : are
group of people , often located in different places, whose
judgements are valued. This group procides inputs to the
decision makers before the forecast is made.
Sales force composite :
*Each salesperson is asked to project their sales.
Since the salesperson is the one closest to the
marketplace, he has the capacity to know what the
customer wants. These projections are then combined
at the municipal, provincial and regional levels.
*Each salesperson estimates what sales will be in his or
her region. These forecasts are then reviewed to
ensure they are realistic and then combined at the
district and national levels to reach an over all forecast.
Consumer market survey:
The customers are asked about their
purchasing plans and their projected buying
behavior. A large number of respondents is
needed here to be able to generalize certain
results. A forecasting method method that
solicits input from customers or potential
customers regarding future purchasing plans.
17
 Quantitative Method:
■ Time series is a time-ordered sequence of observations taken at regular
intervals over a period of time (e.g. hourly, daily, weekly, monthly, quarterly,
annually)
■ A time series typically has four components :
# Trend – is the gradual, long-term upward or downward movement of the data
over time.
# Seasonality – short-term regular variations related to weather or other factors.
# Cycles – are patterns in the data that occur every several years. Wavelike
variation lasting more than one year.
# Irregular variations – the movements of a variable which is completely
unpredictable. Data caused by chance and unusual situations.
 Time Series Prediction Method
 Using past data and the pattern consists of three prediction methods
in statistics, signal processing, econometrics and mathematical finance, a
time series is a sequence of data points, measured typically at successive
times spaced at uniform time intervals.

Examples of time series are the daily closing value of the Dow Jones index
or the annual flow volume of the Nile River at Aswan.

1. Naïve approach
2. Moving averages
3. Exponential smoothing
4. Trend projection
 Quantitative Method:
a) Naïve Approach :

Assumes that demand in the next period is the same as demand in most recent period;
demand pattern may not always be that stable.
The forecast for any period equals the previous periods actual value.
For example:
If July sales were 50, then Augusts sales will also be 50
If demand in the upcoming week turns out to be 54 units, the forecast for the
following would be 54 units.
b) Moving Average - the method used to make
predictions with the average weight of either using or not.

MOVING AVERAGE

Disadvantages
Other factors that will
Advantages influence product sales are not
taken into account
Can calculate the total future
the same weight is given
forecasts quickly
to all the past is causing inaccurate
Easily and quickly
predictions
example 1: Calculation of the moving average (Simple MA)
Data requests from the Tannery for 2006

MONTH DEMAND
1 100
2 105
3 115
4 110
5 108
106.5 @ 107 unit
6 106
7 112 110.0 unit
8 116
9 110

Forecast month10112.7 @ 113 unit

Suppose that the moving average is 3 months (3 months MA)

Calculation:
a) to Ft months 4 months @ F4

= 100 + 105 + 115

3

= 106.5 @ 107 unit

b) to Ft months 5 months @ F5

= 105 + 115 + 110

3

= 110.0 unit

c) to Ft months 10 months @ F10

= 112 + 116 + 110

3

= 112.7 @ 113 unit

EXERCISE 2

Zana Garden Supply want a 3 month moving average forecast, including a forecast for next January
For shed sales.
MONTH ACTUAL SHED SALES 3 MONTH MOVING
AVERAGE
January 10
February 12
March 13
April 16
May 19
June 23
July 26
August 30
September 28
October 18
November 16
Disember 14
example 3: Calculation of the weighted moving average (WMA)
Data requests from the Tannery for 2008

MONTH DEMAND
1 100
2 105
3 115
4 110
5 108
6 106
7 112
8 116
9 110

Suppose that the moving average is 3 months and start month 4 and
5. Assuming that the nearest month given a weight of 50% while the 2
months weighted 30% and 20%. Search on the demand forecasts
Calculation:
a) to Ft months 4 months @ F4

= 0.5 (115) + 0.3 (105) + 0.2 (100)

= 109 unit

b) to Ft months 5 months @ F5

= 0.5 (110) + 0.3 (115) + 0.2 (105)

= 110.5 @ 111 unit
Example 4
Zara Garden Supply wants forecast storage shed sales by weighting the past 3 month, with more Weight given to recent data to
make them more significant.
MONTH ACTUAL SHED SALES 3 MONTH WEIGHTED MOVING
Weight period
AVERAGE
appplied
JANUARY 10
3 Last month
FEBRUARY 12
2 Two months ago
MARCH 13 1 Three months ago
APRIL 16

MAY 19

JUNE 23

JULY 26

AUGUST 30

SEPTEMBER 28

OCTOBER 18

NOVEMBER 16

DECEMBER 14
TREND PROJECTION

Method of Exponential Smoothing

The exponential smoothing is an averaging method that reacts more strongly to recent changes in demand
by assigning a smoothing constant to the most recent data more strongly; useful if recent changes in data
are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations

where:

▪ Ƒt = new forecast
▪ Ft-1 = previous period’s forecast

▪ α is the weighting factor, which ranges from 0 to 1

 At-1 = previous period’s actual demand
example:
Calculate the forecast in May to the API Co. Ltd. by using Exponential
Smoothing if the value of α (alpha) is 0.4

ACTUAL DEMAND FORECAST MONTH T (FT)

MONTH
(UNIT)
JANUARY 100 F1=100 (given)
FEBRUARY 200 F2=F1 +α(A1-F1)=100+0.4 (100-100)=100
MARCH 300 F3=F2+α(A2-F2)=100+0.4(200-100)=140
APRIL 400
MAY 500
LINEAR REGRESSION
b = slope of the regression line
⅀ = summation sign
ᵡ = known values of the independent variable
ẏ = known values of the dependent variable
ȳ = average of the y-values
ᵪ = average of the x-value
n= number of data points or observations

can compute y- intercept ạ as follows =

ạ = y-bx
EXAMPLE Linear Regression:

Nodel Construction Company renovates old homes in West Bloomfield, Michigan. Over time
The company has found that its dollar volume of renovation work is dependent on the West
Bloomfield area payroll. Management wants to establish a mathematical relationships to
help predit sales

NODEL SALES AREA PAYROLL

(IN MILLION) (IN MILLION)
2.0 1
3.0 3
2.5 4
2.0 2
2.0 1
3.5 7
SOLUTION :

SALES, y Payroll x
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
EXAMPLE :

CAUSAL METHOD : CORRELATION

Sales (y) Salary X2 xy Y2

Puluh ribu (x)

2.0 1 1 2 4

3.0 3 9 9 9

2.5 4 16 10 6.25

2.0 2 4 4 4

2.0 1 1 2 4

3.5 7 49 24.7 12.25

∑ y = 15.0 ∑ x =18 ∑ x2 = 80 ∑ xy = 51.5 ∑ y 2 = 39.50

Correlation
r = n(∑xy) – (∑x)(∑y)
√ [n∑x2 – (∑x)2 ] [ n∑y2 – (∑y)2]
r = 6 (∑51.5) – (18)(15)
√ [ 6 (80) – (18)2] [6 (39.50) – (15)2]
r = 0.901
(relationship between two variable is very strong)
r2 = ( 0.901)2 = 0.81
AGGREGATE PLANNING
Define aggregate planning in operation
Discuss the concept of aggregate planning in operation
Explain the aggregate planning strategies
Aggregate Planning
Determine the quantity and timing of
production for the immediate future
 Objective is to minimize cost over the
planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
DEFINITION

■ Aggregate Production Planning is a planning method

which evaluate future work schedules for one or
more products so that forecasted sales can be
satisfied
objective

The objective of aggregate planning

is usually to meet forecast demand
while minimizing cost over the
planning period
THE CONCEPT OF AGGREGATE PLANNING IN
OPERATION
Aggregate Planning Strategies
Aggregate Planning Strategies

1. Should inventories be used to absorb

changes in demand?
2. Should changes be accommodated by
varying the size of the workforce?
3. Should part-timers, overtime, or idle time be
used to absorb changes?
4. Should subcontractors be used and
maintain a stable workforce?
5. Should prices or other factors be changed to
influence demand?
Aggregate Planning Strategies
Pure Strategies
■ Capacity Options — change capacity:
– changing inventory levels
– varying work force size by hiring or layoffs
– varying production capacity through
overtime or idle time
– subcontracting
– using part-time workers
Aggregate Planning Strategies
Pure Strategies

■ Demand Options — change demand:

– influencing demand
– backordering during high demand periods
– counterseasonal product mixing
Aggregate Planning Strategies
■ Mixed strategy
– Combines 2 or more aggregate scheduling
options
■ Level scheduling strategy
– Produce same amount every day
– Keep work force level constant
– Vary non-work force capacity or demand
options
– Often results in lowest production costs
Aggregate Planning Methods
■ Graphical & charting techniques
–Popular & easy-to-understand
–Trial & error approach
■ Mathematical approaches
–Transportation method
–Linear decision rule
–Management coefficients model
–Simulation