PRODUCTION PLANNING AND CONTROL

(BMM4823 )

FORECASTING
 Lesson Outcomes
Week Forecasting
2  Define the meanings of forecasting

 Explain the importance of forecasting

 Explain short term, intermediate term and long term forecasting (horizon)

 Describe quantitative and qualitative forecasting approach and methods

3  Construct a forecasting model

 Evaluate the forecasting performance, determine the mean error, mean absolute
deviation, mean squared error, mean absolute percentage error

 Forecast the demand using cumulative average, a simple moving average, a weighted
moving average and simple exponential smoothing (methods)
4  Forecast the demand by using linear regression analysis

 Develop a regression equation for predicting the level of demand (multiple regression)

 Distinguish between time series model and a causal model

 Learning Objectives
When you complete this chapter you should
be able to :
1. Understand the three time horizons and
which models apply for each use
2. Explain when to use each of the four
qualitative models
3. Apply the naive, moving average,
exponential smoothing, and trend methods
 Learning Objectives
When you complete this chapter you should
be able to :
4. Compute three measures of forecast accuracy
5. Develop seasonal indexes
6. Conduct a regression and correlation analysis
7. Use a tracking signal
 What is Forecasting?
 Process of predicting a
future event
 Underlying basis
of all business
??
decisions
 Production
 Inventory
 Personnel
 Facilities
??
Walt Disney Burger – 9 Mil/year
Soft drinks -50 Mil

 Hong Kong (2005)

 Paris (1992)
 Tokyo (1983)
Finance
 Florida & California Labor
 Profit $40 billion management
Maintenance
Park scheduling
5 years average forecast – 5% error
 Annual forecast – 0-3% error
Cont’d
 Gross Domestic Product (GDP)
 Exchange rates
 Arrivals into US

 Applied resources
- 35 analysts
- 70 field people
 Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels,
job assignments, production levels
 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location,
research and development
 Proton at Tanjung Malim
 Identify the purpose of
forecast

Collect historical data

Forecasting Process Plot data and identify pattern

Select forecast model –

appropriate for data

Develop/compute forecast

Check forecast accuracy

Check forecast accuracy

Is accuracy
of forecast
No
acceptable

Yes
Forecast over planning
horizon

Adjust forecast based on

qualitative information

Monitor results and forecast

accuracy
 The Realities!
 Forecasts are seldom perfect
 Most techniques assume an underlying
stability in the system
 Product family and aggregated forecasts
are more accurate than individual product
forecasts
 Forecasting Models
Forecasting
Models
Qualitative Quantitative
Approach Approach

Delphi
Method Time Series
Methods
Jury of Executive
Opinion
Naive
Sales Force Causal
Composite Methods
Moving
Average
Consumer Market
Survey Weighted
Moving Average

Exponential
Smoothing
Simple
Regression
Analysis Trend Analysis

Seasonality
Multiple Analysis
Regression
Analysis
 Forecasting Approaches
Qualitative Methods
 Used when situation is vague and
little data exist
 New products
 New technology
 Involves intuition, experience
 e.g., forecasting sales on Internet
 Forecasting Approaches
Quantitative Methods
 Used when situation is ‘stable’ and
historical data exist
 Existing products
 Current technology
 Involves mathematical techniques
 e.g., forecasting sales of color
televisions © 2011 Pearson Education
 OVERVIEW OF QUALITATIVE
METHOHDS
1. Jury of executive opinion
2. Delphi method
3. Sales force composite
4. Consumer Market Survey
 Overview of Qualitative Methods
1. Jury of executive opinion
 Pool opinions of high-level experts, sometimes
augment by statistical models
2. Delphi method
 Panel of experts, queried iteratively

3. Sales force composite

 Estimates from individual salespersons are
reviewed for reasonableness, then aggregated
4. Consumer Market Survey
 Ask the customer
 Jury of Executive Opinion
 Involves small group of high-level experts
and managers
 Group estimates demand by working
together
 Combines managerial experience with
statistical models
 Relatively quick
 ‘Group-think’
disadvantage
 Sales Force Composite

 Each salesperson projects his or her

sales
 Combined at district, state and
national levels
 Sales reps know customers’ wants
 Tends to be overly optimistic
 Delphi Method

 Iterative group process,

continues until consensus
is reached Decision Makers
(Evaluate responses
 3 types of participants and make decisions)
3
 Decision makers Staff
(Administering
 Staff survey)
1
 Respondents
Respondents
(People who can make
valuable judgments)
2
© 2011 Pearson Education
 Consumer Market Survey

 Ask customers about purchasing

plans
 What consumers say, and what they
actually do are often different
 Sometimes difficult to answer
 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Weighted moving averages time-series models
4. Exponential smoothing
5. Trend projection/analysis
6. Linear regression
7. Multiple regression causal model
 Time Series Forecasting

 Set of evenly spaced numerical data

 Obtained by observing response variable at regular
time periods

 Forecast based only on past values, no other

variables important
 Assumes that factors influencing past and present
will continue influence in future
 Time Series Components

Trend Cyclical

Seasonal Random
 Components of Demand
Trend
component
Demand for product or service

Seasonal peaks

Actual
demand line

Average
demand over 4
years
Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1
 Trend Component
 Persistent, overall upward or downward
pattern
 Changes due to population, technology, age,
culture, etc.
 Typically several years duration
 Seasonal Component
 Regular pattern of up and down fluctuations
 Due to weather, customs, etc.
 Occurs within a single year

Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52
 Cyclical Component
 Repeating up and down movements
 Affected by business cycle, political, and economic
factors
 Multiple years duration
 Often causal or
associative
relationships
 Eg airline industry

0 5 10 15 20
 Random Component
 Erratic, unsystematic, ‘residual’ fluctuations
 Due to random variation or unforeseen events
 Short duration and no repeating
 Haze, diseases

M T W T F
 TASK 1
Discuss on how a company could forecast
accurately in the situation of poor economy?

Food & beverages

Automotive
University
Thank you