INDEPENDENT UNIVERSITY BANGLADESH

MBA Program
Course Name: Operations Management (MBA 512)

Course Instructor
Dr. Md.Ahashan Habib
Assistant Professor

Md.Ahashan Habib, Asst.

Professor, Dept. of TEM,
BUTex.
 Chapter:
Forecasting

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
• Definition: A sales forecasting is an estimate of
the amount of sales for a specified future period
under a proposed marketing plan or program.

• American Marketing Association defined: “An

estimation of sales in dollars or physical units for
specified future period under a proposed
marketing plan or programme and under an
assumed set of economic and other forces
outside the unit for which the forecast is made”.
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
 Importance of sales forecasting
The near future sales forecast supplies and economic
foundation for operation planning, scheduling,
production , programming, inventories, logistics of
physical distribution and projecting cash generation
and operating profit.

Long run sales forecasts supply the frame-work for

corporate investment, planning, sourcing capital and
rationing it among tangible investment proposals such
as modernization, and expansion capacity, among
intangible investment such as research promotion and
executive development.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 Applications of Forecasting
• Marketing: Reliable forecasts of market size, market characteristics,
market share, trends in prices, new product development and promotion,
e-business strategies, global competition strategies and so on.
• Finance and Accounting: Projection of cash flows and the rates of various
expenses and revenues, new capital acquisitions, new product/process cost
estimates, cash management, timing and amount of funding or borrowing
needs and so on.
• Operations: Scheduling, capacity planning, work assignments and
workloads, inventory planning, make-or-buy decisions, outsourcing, project
management.
• Personnel: Forecasting of number of workers; turn- over in each category,
etc.
• Human resources: Hiring activities, including recruitment, interviewing,
and training, layoff planning, including outplacement counseling.
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
Factors Affecting Product Demand Forecast

Advertising
Marketing
After-sale Service DEMAND

Product/Service Design
Credit policy
Quality

Competing products

Figure :Variables affecting demand for product or service

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 Forecasting Time Horizons
Forecasted Topic Time
Horizon

Item Demands Short Run

Aggregate Intermedi-ate
Run
Demands

Strategies & Facilities Long Run

Present Five Years +

Figure: Decisions involved in various time horizons

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
1. Short range forecast: A forecast that has a time span
of one year but is generally less then three months.
The use of such forecast is for purchase planning, job
scheduling, workforce levels, job assignments and
production levels.
2. Medium-range forecast: Medium range or
intermediate range forecast generally spans from
three months up to three years. It is useful in sales
planning, production planning and budgeting, cash
budgeting, and analyzing various operating plans.
3. Long range forecast: It is usually used for new
products, capital expenditures, facility location or
expansion, and research and development.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 Ranges of Horizon or Application Characteristics Forecast Method
forecasts Time Span
Long-range Generally 5 Business planning: ∙ Broad, general ∙ Technological
years or more ∙ Product planning ∙ Often only ∙ Economic
∙ Research qualitative ∙ Demographic
programming ∙ Marketing studies
∙ Capital planning ∙ Judgment
∙ Plant location &
expansion
Medium-ran Generally 1 Aggregate planning: ∙ Numerical
ge season or 2 ∙ Capital & cash budgets ∙ Estimate of
years ∙ Sales planning reliability needed ∙ Collective opinion
∙ Production planning ∙ Not necessarily at ∙ Time series
∙ Production & the item level ∙ Regression
Inventory budgeting ∙ Economic index
correlation or
combination
∙ Judgment
Short-range Generally less Short-run control: ∙ May be at item ∙ Trend extrapolation
than 1 season ∙ Adjustment of level for planning ∙ Graphical
or 1 year production & of activity ∙ Judgment
employment levels ∙ Should be at ∙ Exponential
∙ Purchasing adjustment of smoothing
∙ Job scheduling purchases and
∙ Project assignment inventory
∙ Overtime
Md.Ahsan Habib, Asst. Professor, Dept. of
decisions
TEM, BUTex
STEPS IN THE FORECASTING PROCESS
1. Determine the purpose of the forecast. How will it be
used and when will it be needed?
2. Establish a time horizon. The forecast must indicate a
time interval, keeping in mind that accuracy decreases
as the time horizon increases.
3. Obtain, clean, and analyze appropriate data.
Obtaining the data can involve significant effort. Once
obtained, the data may need to be “cleaned” to get
rid of outliers and obviously incorrect data before
analysis.
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
4. Select a forecasting technique.
5. Make the forecast.
6. Monitor the forecast. A forecast has to be
monitored to determine whether it is
performing in a satisfactory manner. If it is
not, reexamine the method, assumptions,
validity of data, and so on; modify as needed;
and prepare a revised forecast.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
Different Forecasting Approaches
Forecasts

Qualitative Quantitative

Jury of Sales force Consumer Delphi Causal or

executives composite Technique Time explanatory
market
survey series

Naive Decomposition

Simple Moving Weighted Exponential Additive Multi-plic Regression

average average moving smoothing ative Economic
average

Figure 3.3.1: Different forecast methods

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 The Qualitative Methods of Forecasting

• Jury of executive opinion: Under this method, 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.
• Sales force composite: In this approach each sales person
estimates what sales will be in his/her region. This forecast
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: This method solicits input from
customers or potential customers, regarding their future
purchasing plans. It can help not only in preparing a
forecast, but also in improving product design and planning
for new products.
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
 Delphi method
• This is a group process intended to achieve a
consensus forecast. There are three different types of
participants in the Delphi method– (1)
decision-makers/experts, (2) staff
personal/coordinator and (3) respondents. The
procedure works as follows:
• a. A coordinator poses a question, in writing, to
each expert of a panel.
• b. Each expert writes a brief prediction.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
• C. The coordinator brings the written predictions
together, edits them, and summarizes them.
• d. On the basis of the summary, the coordinator
writes a new set of questions and gives them to
the experts. These are answered in writing.
• e. Again, the coordinator edits and summarizes
the answers, repeating the process until the
coordinator is satisfied with the overall prediction
synthesized from the experts.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
QUANTITATIVE METHOD OF FORECASTING

• Time Series: The time series model predicts

the simple assumption that the future is a
function of the past. In other words, they look
at what has happened over a period of time
and use a series of past data for forecasting.
Some of the tools are:
• a) Simple average
• b) Moving average
• C) Exponential smoothing
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
 QUANTITATIVE METHOD OF
FORECASTING
Time Series Models
A time series is a time-ordered sequence of observations
taken at regular intervals (e.g., hourly, daily, weekly, monthly,
quarterly, annually). The variable is observed at discrete time
points, usually equally spaced.
Time series analysis involves:
1. Describing the process or phenomena that generate the
sequence.
2. To forecast, it is necessary to represent the behavior of the
process by a mathematical model.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 Characteristic Pattern of Time Series
1. Constant process: If the sales do not show
significant variation form its average level
then the process remains at a constant level
over time (some minor variations from period
to period may happen due to random causes).
xt

Time, t
Md.Ahsan Habib, Asst. Professor, Dept. of
Figure : A constantTEM, BUTex
pattern showing unchanged level of sales
2. Trend: If a clear long term variation (increase
or decrease) in demand or sales from period
to period is found (with or without random
variation) then it is attributed to trend. Trend
is positive if the sales increases and vice versa.
b2
xt

b1

Time, t

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
3. Cyclic: It represents the recurrent pattern of variable
(periodic) over a number of years. Seasonal variation
can be treated apart from it consisting of similar
periodic patterns that occur within each year.
• Example: Demand of soft drinks, ice-cream,
moisturizer lotion depends on weather or season.

Figure : A cyclicMd.Ahsan
pattern showing seasonal variation
Habib, Asst. Professor, Dept. of
TEM, BUTex
4. Impulse: It is a transient pattern that shows a sudden
massive change; for a few periods the process may
operate at a higher level before reverting to the original
level. It can be positive or negative. Positive impulse
indicates sudden massive increase while negative
impulse indicates the contrary situation.
• Example: A temporary increase in sales caused by a
strike at a competitor’s plant.

Md.Ahsanpattern
Figure: A positive impulse Habib, Asst. Professor, Dept. of
TEM, BUTex
5. Step change: Change to a new level is
permanent, e.g. by the acquisition of a new
customer. Step change can also be both
positive and negative as shown in the figure.
Step change can be negative if the sales drop
down from higher level to a lower level.

xt xt

t t
Figure : Positive and negative impulse pattern

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
Naive Method
A naive forecast uses a single previous value of a time
series as the basis of a forecast. The naive approach
can be used with the following time series patterns:
Stable (constant) series : Last data point becomes the
forecast for the next period.
Seasonal variations (cyclic): Forecast for this “season”
is equal to the value of the series last “season.”
Trend: Forecast is equal to the last value of the series
plus or minus the difference between the last two
values of the series. For example, suppose the last two
values were 60 and 63. The next forecast would be 66.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
Simple Moving Average
• Average of the most recent N observation. i.e.;

• At each period the oldest observation is discarded and the newest

one added to the set.
• At the end period the oldest observation is discarded and the
newest one is added to the set.
• At the end of period T, the forecast for any future period.

Here,
= Forecast for period ahead
(T)= Forecast made at period T

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
• Example: Monthly sales figure (from January
to November) of an electric equipment trader
is given below. A forecasting model is to be
made including the next 3 months with an
average period, N= 3. Compare the result of
December with the result obtained by Naive
method.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
• The forecasted result for the next 3 months
shows a constant sales figure of 244.3
obtained by simple moving average technique.
• Now, if we apply Naive method, the
forecasting value for the month of December
would be the actual sales value of November
i.e. 235. Therefore, result obtained by the
moving average technique gives an increase
estimation of 244.3- 235 = 9.4 products.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
 Simple Linear Regression

• The simplest and most widely used form of

regression involves a linear relationship between two
variables. A plot of the values might appear like that
in Figure. The object in linear regression is to obtain
an equation of a straight line that minimizes the sum
of squared vertical deviations of data points from the
line (i.e., the least squares criterion). This least
squares line has the following equation of straight
line:
y= a + b x
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
• Example: Data of weekly demand of a product are given
below. Plot the graph and show that a linear trend line is
appropriate. Develop a linear trend equation for the following
data. Then use the equation to predict the next two values of
the series.

Md.Ahsan Habib, Asst. Professor, Dept. of

TEM, BUTex
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex
 Home Work
• Cell phone sales for anElectronics company over the last 10
weeks are shown in the table below. Plot the data, and
visually check to see if a linear trend line would be
appropriate. Then determine the equation of the trend line,
and predict sales for weeks 11 and 12.
Week Unit Sales
1 700
2 724
3 720
4 728
5 740
6 742
7 758
8 750
9 770
10 775
Md.Ahsan Habib, Asst. Professor, Dept. of
TEM, BUTex