Module 2: Forecasting service is demanded by numerous independent

sources.
Introduction
Because they offer data on anticipated demand, 4. As the time horizon (the length of the forecast's
forecasts are a fundamental input in operations coverage period) grows, forecast accuracy declines.
management decision-making processes. It is In general, short-range projections are more
impossible to exaggerate the value of forecasting in accurate than long-range forecasts because they
operations management. Supply and demand have to deal with fewer uncertainty. The ability to
matching are the main objective of operations respond quickly to changes in demand necessitates
management. A demand forecast is necessary to a shorter forecasting horizon, which allows flexible
determine how much capacity or supply will be corporate organizations to profit from more
required to satisfy the demand. For instance, in accurate short-term projections than less flexible
order to decide on workforce levels and equipment competitors that must utilize longer forecast
purchases, operations must know how much horizons.
capacity is required. Budgets must be developed.
Lesson 2. Elements of a Good Forecast
Lesson 1. Features Common to All Forecasts A forecast that has been adequately developed
There are several different forecasting methods in should meet the following criteria:
use. They are really different from one another in a
lot of ways, as you will soon find out. But everyone 1. The forecast ought to be accurate. Usually, it
shares some characteristics, therefore it's critical to takes some time for people to react to the
be aware of them. information in a forecast. For instance, inventory
levels cannot be rapidly adjusted, nor can capacity
1. The main premise of forecasting methods is that be increased over night. Therefore, the forecasting
the same underlying causal system that existed in horizon must include the amount of time required
the past will persist in the future. to put such changes into effect.

A management cannot just hand over forecasting 2. The forecast must be precise, and the level of
to models or computers and walk away since precision must be specified. Users will be able to
unforeseen events can seriously derail forecasts. prepare for any inaccuracies thanks to this, and it
Demand can be significantly impacted by a variety will also give them a basis for contrasting various
of factors, such as weather-related occurrences, tax forecasts.
hikes or decreases, changes in the cost of rival
goods and services, and changes in tax rates. As a 3. The forecast needs to be accurate and constant.
result, a management needs to be aware of these Users will be hesitant about using a method if it
occurrences and prepared to disregard forecasts sometimes produces accurate forecasts and other
because they rely on a stable causal system. times produces inaccurate ones because they fear
getting burned every time new forecast is issued.
2. The presence of randomness prevents a perfect
forecast, and actual results frequently diverge from 4. The forecast should be given in understandable
projected values. Forecasting inaccuracies should units. Production planners must know how many
be considered. units will be produced, financial planners must
know how much money will be needed, and
3. Because forecasting errors among items in a schedulers must know what equipment and
group typically have a canceling effect, forecasts for expertise will be needed. The user's needs
groups of items are typically more accurate than determine the choice of units.
forecasts for individual terms. Opportunities for
grouping may arise if components or raw materials 5. A written forecast is required. Even while it won't
are used for multiple products or if a good or be guaranteed, there will be a greater chance that
everyone involved is using the same information. A 3. Collect, purify, and evaluate the proper data.
documented projection will also enable an The data can be obtained with a lot of work. The
unbiased basis for assessment whenever actual data may need to be "cleaned to remove outliers
findings are available. and blatantly inaccurate data before analysis once
it has been received.
6. The forecasting method should be easy to
comprehend and apply. Users frequently lack trust 4. Pick a forecasting method.
in forecasts made using complex procedures
because they are unaware of both the situations in 5. Keep track of forecasting errors. To assess
which the techniques are appropriate and their whether the prediction is operating satisfactorily,
limitations. Technique misuse is a clear result. It the forecast errors should be tracked. If it isn't,
should come as no surprise that reasonably reevaluate the approach, make any modifications,
straightforward forecasting methods are often used check the accuracy of the data, and create an
because consumers find them easier to use. updated forecast.

7. The projection should be profitable: The Also keep in mind that additional action might be
advantages should outweigh the disadvantages. required. For instance, if demand was significantly
lower than expected, a price cut or promotion may
Lesson 3. Forecasting and the Supply Chain be necessary. In contrast, increasing output would
Forecasts that are accurate are crucial for the be useful if demand turned out to be far higher
supply chain. The supply chain may experience than expected. That can entail putting in extra
shortages and surpluses as a result of inaccurate hours, outsourcing, or taking other actions.
forecasts. Missed delivery, disruption of operations,
and subpar customer service can result from Lesson 5. Approaches to Forecasting
shortages of resources, parts, and services. On the For qualitative and quantitative forecasting, there
other hand, overly pessimistic predictions may are two general approaches. Most of the inputs
result in excesses of supplies and/or capacity, which used in qualitative approaches are subjective and
raises prices. Customer service is negatively frequently defy accurate numerical definition.
impacted by both shortages and surpluses in the Quantitative techniques either require
supply chain, as are earnings. Furthermore, extrapolating previous data or creating associative
incorrect forecasts may cause brief surges and models that aim to forecast using causal
declines in orders to the supply chain, which the (explanatory) variables.
supply chain may perceive incorrectly.
The forecasting process can incorporate soft
Lesson 4. Steps in the Forecasting Process information, such as human aspects, individual
The forecasting process consists of six fundamental perspectives, and hunches, thanks to qualitative
steps: methodologies. Because they are challenging or
impossible to quantify, those aspects are frequently
1. Identify the forecast's objective. When and how left out or minimized when quantitative techniques
will it be required? How will it be used? This stage are applied. The essential component of
will show how much detail is needed in the quantitative approaches is the analysis of objective,
prediction, how much money, computer time, and or hard, data. They often steer clear of personal
human labor may be justified, and how accurate prejudices, which can occasionally taint qualitative
the forecast must be. methodologies. In actuality, one or both
approaches—or a combination of the two—might
2. Decide on a timeline. The forecast must provide be utilized to create a forecast.
a time period while keeping in mind that accuracy
declines with increasing time horizon.
Lesson 6. Qualitative Forecast Consumer Surveys - It makes sense to ask
Forecasters occasionally make predictions simply consumers for feedback because they are the ones
based on their own judgment and opinions. There who ultimately determine demand. However, most
might not be enough time to obtain and analyze of the time there are either too many clients or no
quantitative data if management needs a reliable technique to identify all possible
projection immediately. Other times, particularly customers. In order to sample consumer opinions,
when political and economic circumstances are organizations looking for consumer input typically
changing, the information that is currently available turn to surveys of that population. Consumer
may be outdated and newer data may not yet be surveys can get data that might not be available
accessible. In a similar vein, the launch of new elsewhere, which is their clear advantage. On the
items and the redesign of current products or other hand, designing a survey, carrying it out, and
packaging are hampered by the lack of historical accurately interpreting the findings for accurate
data that would be useful for forecasting. Forecasts information all take a significant amount of
in these situations are based on executive opinions, knowledge and expertise. The cost and effort
customer surveys, sales staff opinions, and expert involved in surveys might be high. Furthermore,
opinions. even under ideal circumstances, irrational behavior
patterns may still be present in public opinion
Executive Opinions - A small group of senior surveys.
managers might get together and create a
prediction, such as those in marketing, operations, Lesson 7. Choosing a Forecasting Technique
and finance. This method is frequently applied to There are many various sorts of forecasting
the development of new products and long-term methods, and no one method is best in all
planning. It provides the benefit of combining the circumstances. The manager or analyst must take a
vast expertise and abilities of many management. variety of aspects into account while choosing a
However, there is a chance that one person's technique.
opinion will prevail, and it's possible that spreading
out responsibility for the forecast between The two most crucial elements are price and
everyone may make it less pressing to come up accuracy. How much money has been set aside to
with an accurate prognosis. create the forecast? What are the potential costs of
mistakes and what are the potential rewards of a
Salesforce Opinions - Due to their frequent precise forecast? It is crucial to carefully consider
interactions with customers, members of the sales cost-precision trade-offs because, in general, the
or customer service teams are frequently reliable higher the accuracy, the higher the cost. The best
sources of information. They frequently are forecast is not always the most accurate or the
informed of any future plans the clients may have. cheapest; rather, it is some compromise between
However, there are a number of disadvantages to accuracy and cost that management deems to be
employing salesforce opinions. One is that ideal.
employees might not be able to tell the difference
between what clients would like to do and what The availability of historical data, the accessibility of
they will actually do. Another is that these folks computer software, and the time required to
occasionally overreact to current events. As a gather, analyze, and create the forecast are other
result, their projections may start to become factors to consider when choosing a forecasting
pessimistic after multiple periods of poor sales. technique. The prediction horizon is crucial since
They could become overly hopeful after numerous some strategies work better for short-term
successful sales cycles. Additionally, there will be a forecasts while others are better suited to long-
conflict of interest if predictions are utilized to set term projections.
sales quotas because it is in the salesperson's best
interest to produce low sales estimates. Lesson 8. Using Forecast Information
A management can approach a forecast in one of
two ways: reactively or proactively. Forecasts are
seen as likely future demand in a reactive strategy,
and managers respond to satisfy that need (e.g.
adjusts production rates, inventories, the
workforce). A proactive strategy, on the other
hand, aims to actively affect demand (for instance,
by advertising, pricing, or modifications to products
or services).

Generally speaking, a proactive strategy

necessitates either an explanatory model (like
egression) or an opinion on the impact on demand.
If the outcomes of the status quo projection are
unacceptable, the management may prepare two
forecasts: one to predict what would happen under
the status quo and one based on a what-if
approach.

Lesson 9. Computer Software in Forecasting

When creating forecasts based on quantitative
data, computers are crucial. By using them,
managers may create and modify forecasts rapidly
and without having to perform labor-intensive
human calculations. For forecasting, a variety of
software programs are available. The text website's
Excel templates serve as an illustration of a
spreadsheet strategy.