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Presented By GROUP 5 : Asha Jaikishan (126

12/15/09

Neha Agarwal (136 Shyamashree Das (160) SECTION-C PGDM-III rd Trimester S.Pramoth (148)

**Forecasting as Planning tool
**

Ø Managerial decision making is complicated. Ø Examples: § Production facility: Demand § Hospital : Specialty health wing Ø Forecasting: branch of operations management Ø Estimates of timing and magnitude of occurrence of future events . Ø Important tool in public policy decisions as well. Ø

Functions

Ø Estimation tool Ø Method of addressing the complex and uncertain environment surrounding business decision making. Ø Tool for predicting events related to operations planning and control. Ø Vital prerequisite for the planning process in organizations.

**Forecasting Time Horizon
**

Criterion Typical duration Nature of decisions Key considerations Nature of data Degree of uncertainty Examples Short-term 1-3 months Medium-term Long -term 12-18 months 5-10 years

Purely tactical Tactical as well Purely as strategic strategic Random effects Seasonal and L-T trends and cyclical effect business cycles Mostly Subjective & Largely quantitative qualitative subjective Low Significant high Revising quarterly production New business development New product introduction

**D e sig n O f F o re ca stin g S y ste m s • 3 Stage Process:
**

üDevelop A Forecasting Logic By Identifying The Purpose, data And Models To Be Used. üEstablish Control Mechanisms To Obtain Reliable Forecasts. üIncorporate Managerial Considerations In Using The Forecasting System.

Sources Of Data Ø Sales force estimates Ø Point of sales data system Ø Forecast from supply chain partners Ø Trade/industry association journals Ø B2B portals/Market places Ø Economic surveys and indicators Ø Subjective knowledge

M ETH O D S O F F O R E C A S T IN G

Time Series

§ § It Is A Collection Of Data At Fixed Time Intervals Over Several Years. § § Forecasting Time Series Implies That Predictions About The Future Values Are Made Only From Past Data.

EXAMPLE

YEAR 1987 1988 1989 1990 1991 1992 1993 1994 SALES OF FIRM A (‘000 UNITS) 40 42 47 41 43 48 65 41

COMPENTS OF TIME SERIES Secular Trend Seasonal Variation Cyclical Movements Random Movements

SECULAR TREND The General Tendency Of The Data To Grow Or Decline Over A Long Period Of Time. OF YEAR YEAR SALES SALES OF TV SETS 2004 TV SETS 2000 2000 4000 For Example :

2001 2002 2003 2500 3097 3568 2005 2006 2007 4567 5000 5500

SEASONAL VARIATIONS

Fluctuations That Occur Periodically- Movements Recurring Within A Definite Period, May Be A Every Week Or Month- With Reasonably High Degree Of Predictability. Example ; For A Soft Drink Manufacturer, Yearly Sales May Be Increasing But Sales Are Likely To Be High Every Summer And Low Every Winter.

Cyclical movements

These are caused by business cycles or trade cycles. These movements are of more than a year. Example: Sales of a company High- because of prosperity phase of business cycle Low- because of depression

RANDOM MOVEMENTS

They Are Residual Or Erratic Movements That Do Not Have Any Set Pattern And Are Usually Caused By Some Unpredictable Reasons. Example : Flood, Wars, Strikes, Earthquakes Etc

TIME SERIES MODELS OF FORECASTING

Moving Averages Exponential Smoothing Trend Projection

MOVING AVERAGE

It Attempts To Forecast Values On The Basis Of The Average Of The Values Of Past Few Periods. Successive Values Are Calculated By Considering New Value And Dropping The Old One.

**SIMPLE MOVING AVERAGE METHOD
**

FT = DT-1 + DT-2 +……..+ DT-n n FT = Moving Average Forecast For Period T D = Actual Demand N = No. Of Periods For Moving Average

For 3 Yearly Moving Average = D1 +D2 +D3 3

**SIMPLE MOVING AVERAGE EXAMPLE
**

MONTH 1 2 3 4 5 6 7 DEMAND 280 288 266 295 302 310 303 3-MONTHLY MOVING AVERAGE 278 283 287.7 302.3

WEIGHTED MOVING AVERAGE FT = DT-1 WT-1+ DT-2 WT-2+……..+ DT-n WT-n WT-1+WT-2+ WT-3 Earlier Example : WEIGHTED MOVING AVERAGE = 266*3 + 288*2 + 280*1 = 275.5 3+2+1

EXPONENTIAL SMOOTHING

In This Method, The Forecast For Next Period Is Calculated As Weighted Average Of All The Previous Values. It Is Based On The Premise That The Most Recent Value Is The Most Important For Predicting Future Value. Also It Presumes That Values Prior To Current Value Are Also Relevant But In Declining Importance As We Go Back In Time. The Weights Decline Exponentially As We Consider The Older Values. Symbolically,

E X P O N E N T IA L S M O O T H IN G

F

T+1

= FT + α( YT – FT)

CHOICE OF SMOOTH CONSTANT IS IMPORTANT MEAN ABSOLUTE DEVIATION(MAD)= ∑ {FORECAST ERROR} N

**Calculate forecasted values and MAD using α =0.2 and 0.5 assuming initial forecast as 208
**

MONT H (t) 1 2 3 4 DEMAN α = 0.2 α = 0.5 D (YT) F T -F T 213 208 5 │YT F T│ 208 5 │YTFT │ 201 209 8 210.5 9.5 198 207.4 9.4 205.75 7.75 207 205.5 1.5 201.87 5.13 TOTAL 23.9 27.38 MAD 5.98 6.845

CAUSAL METHOD

It Is The Method to Construct A Forecasting Logic Through A Process Of Identifying The Factors That Cause Some Effect On The Forecast And Building A Functional Form Of The Relationship Between The Identified Factors.

Simple Regression(Trend Projection)

ECNOMETRIC MODEL(EM)

• Macro-economic Performance Is Predicted For A Variety Of Planning Purposes Using A Large No. Of Variables. • • With The Help Of The Relationship Between These Variables & Dependent Variable Several Predictions Are Made At The Macroeconomic Level & Planning Exercises Are Undertaken. •

DEMERITS

• Developing Such Causal Model Is Time Consuming & Also Very Expensive. • • Demand Specialized Skills Of Model Building & Analysis. • • Requires Use Of Powerful Computing Environment To Handle Complex & Numerous Mathematical Relationships & Regression Analysis.

**INPUT- OUTPUT ANALYSIS
**

• It Takes Into Consideration The Interdependence Of The Different Sectors In The Economy. • • For E.G.- An Input From The Steel Sector Might Give Rise To An Output From The Electricity Sector, Which In Itself Is An Input To The Steel Sector.

MERITS

v It Takes Into Account All The Intricate Relationships In The Economy.

D E M E R IT S

vU tility Is R e stricte d To E co n o m ic A n a ly sis , N o t C o n sid e rin g T h e O th e r B u sin e ss , G o v e rn m e n t, Te ch n o lo g ica l, & In te rn a l F a cto rs . vL im ite d A n a ly sis .

**END USE ANALYSIS
**

• • • It Thoroughly Considers All The Different Uses To Which A Product Will Be Put & Traces The Entire Chain Of Uses In Order To Arrive At A Forecast.

DEMERITS • Limited Approach Since It Considers Only The Demand Side Picture & Not The Supply Side Picture. • • It Does Not Consider Explicitly The Various Other Economic Factors Influencing The Demand Of A Product.

**Qualitative Models Of Forecasting
**

• DELPHI METHOD: It Is An Iterative Group Process And It Employs A Group Of Experts To Obtain Forecasts. • • SALES FORCE COMPOSITE: Each Of The Members Comprising Sales Force Of A Company Are Asked To Estimate The Likely Sales In Their Respective Areas.

• CONSUMER PANEL SURVEY: Here A Consumer Panel Is Maintained And Consumers On Such A Panel Are Questioned About Their Purchase Plans.

Accuracy Of Forecasts

Wrong forecasts could create several problems in the organization as forecasting forms a key input to the planning function.

Forecast Error

• Forecast error for period t, Et denotes the difference between the demand Dt and the forecast Ft for the period.

Et =Dt - Ft

• Sum of errors is merely the sum of errors during the period of consideration which is given by, SFE=∑ Ei

...Cont

**• Mean Absolute Percentage Error(MAPE) MAPE=1/n*∑|Ei|/Di *100 • • Mean Squarred Error(MSE) MSE=1/n*∑ Ei2
**

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