FORECASTIN TOPICS:

Forecasting
G a. Features Common to all Forecasts
THINK ALOUD

b. Elements of a Good Forecast

What do you mean by
c. Steps in Forecasting Process
Forecasting?
d. Choosing a Forecasting Technique

FEATURES COMMON TO ALL

FORECASTS AND ELEMENTS OF A
FORECASTING GOOD FORECAST
•It is a mathematical model adjusted by
• The forecast should be timely.
• It is an art and science of a manager’s good judgment.
• The forecast should be accurate and the
predicting future events. degree of accuracy should be stated.
•Effective planning in both the short and • The forecast should be reliable, it should
• Forecasting may involve work consistently.
long run depends on a forecast of
taking historical data and • The forecast should be expressed in
demand for the company’s products or
projecting them into the future meaningful units.
services.
with some sort of
mathematical model.

Organizations use three
major types of forecasts in
planning future operations.
•Economic forecasts: It addresses
the business cycle by predicting
inflation rates, money suppliers,
housing starts, and other planning
indicators.
Let’s look at the impact of
product forecast on three
activities
1. Human Resources.
2. Capacity
3. Supply Chain Management
THE STRATEGIC IMPORTANCE OF
•Technological forecasts: These are FORECASTING
concerned with rates of technological
progress, which can result in the birth of
exciting new products, requiring new plants
and equipment's. • The forecast is the only
estimate of demand until actual
•Demand forecasts: These are projections of demand becomes known.
demand for a company’s products or service.
These are forecasts , also called sales forecasts, • Forecasts of demand therefore
drive a company’s production, capacity, and
scheduling systems and serve as inputs to drives decision in many areas.
financial, marketing, and personnel planning.
HUMAN RESOURCES CAPACITY
Hiring, training, and laying off workers all
•Capacity is inadequate, the resulting
depends on anticipated demand. shortages can mean undependable delivery,
If the human resource department must hire loss of customers, and loss of market
additional workers without warning, the amount share.
of training declines and the quality of the
workforce suffers.

SUPPLY CHAIN MANAGEMENT
Good supplier relations and the ensuring price
advantages for materials and parts depends on
accurate forecasts.
5. Gather the data needed to make the forecast:
Disney’s forecasting team employs 35 analysts and
70 field personnel to survey 1 million
people/businesses every year.
It also uses the firm called Global Insight for travel
industry forecasts and gathers data on exchange
rates, arrivals into the U.S., airline specials, Wall
Street trends, and school vacation schedules.
SEVEN STEPS IN THE
FORECASTING
SYSTEM
Forecasting follows seven basic steps.
We use Disney World as an example of each
step:
1. Determine the use of the forecast: Disney uses
park attendance forecasts to drive staffing, opening
time, ride availability, and food suppliers.
2. Select the item to be forecasted: For Disney World,
there are six main parks. A forecast of daily attendance at
each is the main number that determines labor,
maintenance, and scheduling.
6. Make the forecast
7. Validate and implement the result:
At Disney, forecasts are reviewed daily at the
highest levels to make sure that the model,
assumptions, and data are valid. Error
measures are applied; then the forecasts are
used to schedule personnel down to
15-minutes intervals.
3. Determine the time horizon of the
forecast: is it short, medium, or long term?
Disney develops daily, weekly, monthly,
annual, and 5-year forecast.
4. Select the forecasting model: Disney
uses a variety of statistical models like,
including moving averages, econometrics, and
regression analysis. It also employs
judgmental, or nonquantitative, models.
QUANTITATIVE
METHODS
•Quantitative methods of forecasting
exclude expert opinions and utilize
statistical data based on quantitative
information.
•Quantitative forecasting models include
time series methods, discounting,
analysis of leading or lagging indicators,
and econometric.
1. Time series analysis accounts for the ANALYSIS OF LEADING OR
fact that data points taken over time LAGGING INDICATORS ECONOMETRICS
may have an internal structure (such
• Leading indicators measure change. They •Econometrics is the application of
as autocorrelation, trend or seasonal
deal with immediate progress and show the statistical methods to economic data
variation) that should be accounted likelihood that you will achieve your goals.
for. in order to give empirical content to
economic relationships
• Lagging indicators measure results. This
2. Discounting is the process of means they are the direct result or output of
determining the present value of a your organization’s activity. It makes lagging
payment or a stream of payments that indicators easy to measure but not as easy to
improve or influence.
is to be received in the future.

QUALITATIVEFORECASTING Steps involved

Four Types of Forecasting Methods
Technique Use
1. Straight line Constant growth rate
2. Moving average Repeated forecasts
Compare one independent
3. Simple linear regression
with one dependent variable
Compare more than one
4. Multiple linear regression independent variable with
one dependent variable
METHODS 1. Choose experts to participate from different areas.
DELPHI METHOD 2. Their questionnaire or email obtain forecasts.
3. Summarize the results.
•To overcome the limitation of above
4. Redistribute results with another new questionnaire.
method, a committee is formed. 5. Summarizes again- refining forecasts.
•A moderator creates a questionnaire & 6. Carry on 3 to 6 rounds
distributes to the participants. The 7. It results in forecasts that most participants have
identity of committee members is ultimately agreed to in spite of their initial
concealed. disagreement.
•Their responses are summed up.
•A new set of questions is prepared.

EDUCATED GUESS
•Judgment based on experience &
intuition to estimate a sales forecast (by
one person)
•Used for short term forecast when cost
of forecast inaccuracy is low.
•Such forecasts have to be made very
frequently.
SURVEY OF SALES FORCE
• Used for existing product when
salespeople sell directly to customers &
a good communication system exists in
an organization.
• Estimates of future regional sales
are obtained from sales people.
• These are refined by managers &
total sales for all regions is
estimated on its behalf.
SURVEY OF CUSTOMERS
•Suitable when a company has few
customers e.g. Automobile/defense
contractors. Estimates are gathered
from customers directly.
MARKET RESEARCH
•Suitable for new products or
introduction of exiting product in new
market segments. Then mail,
questionnaires, surveys, telephone
interviews- hypothesis is tested.
EXECUTIVE COMMITTEE CONSENSUS
•Forecast made by a committee of
knowledge executive from different
departments. Such forecast are
compromise forecast not reflecting
the extremes.
•People from a lower level may not
speak freely to refute the estimates of
people saving above them.
HISTORICAL ANALOGY
• For a new product a generic or existing
product is used as a model. The
analogies may be complementary
product/substitutes. Knowledge of one
product sales during various stages of
its product life cycle is applied to the
estimate of sales for a similar product.
 TOPICS: TASK ANALYSIS
Forecasting Answer the 3 critical thinking question using Q &
A format with answer of 3-5 sentences
a. Features Common to all Forecasts
b. Elements of a Good Forecast 1. Name three underlying reasons why operations
management must forecast.
c. Steps in Forecasting Process 2. Describe how forecasting is integral to business
planning
d. Choosing a Forecasting Technique 3. Define qualitative & quantitative forecasting
methods.

References:
•Operations Management, Eighth Edition, by William J. Stevenson
•Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

• Operations Management, 8th Edition

Prof Nigel Slack, Warwick Business School, Warwick University
Prof Alistair Brandon-Jones, University of Bath
Prof Robert Johnston, Warwick Business School, Warwick University

Thank you! • https://www.slideshare.net/rksen/forecasting-30246921

• https://www.mvorganizing.org/what-are-the-elements-of-a-good-forecast-in-business/
• https://www.investopedia.com/terms/f/forecasting.asp
• https://www.itl.nist.gov/div898/handbook/pmc/section4/pmc4.htm
• https://www.investopedia.com/terms/f/forecasting