Forecasting is process of

Forecasting Defined
estimating a future event by
casting forward past data. The
past data are systematically
combined in a predetermined
way to obtain the estimate of
the future.
Prediction is a process of
estimating a future event based
on subjective considerations
other than just past data, these
subjective consideration need
not be combined in a
predetermined way.
Types of Forecasts by Time
Horizon
• Short-range forecast: Usually < 3 months.
• Job scheduling, worker assignments.
• Medium-range forecast: 3 months to 3 years.
• Sales & production planning, budgeting.
• Long-range forecast: > 3 years.
• New product planning, facility location.

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Short- vs. Long-term Forecasting
• Medium & Long range forecasts:
• Long range for design of system.
• Deal with comprehensive issues.
• Support management decisions regarding
planning.

• Short-term forecasts:
• To plan detailed use of system.
• Usually use quantitative techniques.
• More accurate than longer-term forecasts.
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Eight Steps in Forecasting
• Determine the use of the forecast.
• Select the items to be forecast.
• Determine the time horizon of the forecast.
• Select the forecasting model(s).
• Gather the data.
• Make the forecast.
• Validate and implement results.
• Monitor forecasts and adjust when needed.

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Realities of Forecasting
• Assumes future will be like the past (causal factors will
be the same).
• Forecasts are imperfect.
• Forecasts for groups of product are more accurate
than forecasts for individual products.
• Accuracy decreases with length of forecast.

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Forecasting
Information on recent demand
and production

Demand forecasting for

operations

Planning the system (designing) Controlling the system

Product design Scheduling the system Production control
Process design Aggregate production planning Inventory control
Equipment investment and Operation scheduling Labor control
replacement Cost control
Capacity planning

Output of good and

services
Costs of Errors
How important is forecast accuracy? It depends on the
situation. Often important decisions are based on forecasted
information, and larger errors can result in very costly
mistakes. Some kinds of estimation errors are more costly
than others.
Cost and Accuracy
There is clearly a cost/accuracy tradeoff in selecting a
forecasting approach. The more sophisticated approaches
tend to have relatively high cost of implementation and
maintenance, but they often provide more accurate forecast
with resulting lower operating cost.
Operations Management
Two fundamental approaches to forecasting are dominant.
Intuitive approach- which is based on the experience, is essentially a
summary of manager’s guesses and judgments concerning future
events.
Statistical model approach- is a combination of inferences based on
collected data and population understanding used to predict
information in an idealized form. This means that a statistical model can
be an equation or a visual representation of information based on
research that's already been collected over time.
Forecasting Approaches
Qualitative Methods
¨ Used when little data or
time exist.
¨ New products &
technology.
¨ Long time horizon.
¨ Major changes expected.
¨ Involves intuition,
experience.
¨ Example: forecasting for
e-commerce sales.
Quantitative Methods
¨ Used when situation is
‘stable’ & historical data
exist.
¨ Existing products &
current technology.
¨ No significant changes
expected.
¨ Involves mathematical
techniques.
¨ Example: forecasting sales
of color televisions.
Forecasting Approaches
Qualitative Methods
¨ Delphi method – questions panel of experts for
opinions.
¨ Historical data – makes analogies to the past in a
judgment manner.
¨ Nominal group technique – group process
allowing participation with forced voting.
Forecasting Approaches
Quantitative Methods
Naïve (Time Series) Quantitative Models
¨ Simple moving average - Average past data to predict the future
based on that average.
¨ Exponential soothing-weights old forecast and most recent
demand.
Causal Quantitative Models
¨ Regression analysis- depicts a functional relationship among
variables.
¨ Economic Modeling-provides overall forecast for a variable such as
gross national product (GNP)Involves mathematical techniques.