FORECASTING

OPERATIONS MANAGEMENT

Presented by: Tashe Gregorio

Objectives
Understand Forecasting as a Business Tool essential in the
operations

Determine the different approaches to Forecasting

Identify the various types of Forecasting Tools

Prediction vs Forecasting
Prediction is concerned with future certainty; forecasting looks at
how hidden currents in the present signal possible changes in
direction for companies, societies, or the world at large. Thus, the
primary goal of forecasting is to identify the full range of
possibilities, not a limited set of illusory certainties. Whether a
specific forecast actually turns out to be accurate is only part of the
picture—even a broken clock is right twice a day. Above all, the
forecaster’s task is to map uncertainty, for in a world where our
actions in the present influence the future, uncertainty is
opportunity.[1]
[1] https://hbr.org/2007/07/six-rules-for-effective-forecasting
A forecast is an estimate about the
future value of a variable such as
demand Examples:
staffing and equipment decisions,
budgets,
purchasing needs information for ordering
A basic input in the decision processes of
operations management because they from suppliers
provide information on future demand.

·Having a forecast of demand is essential

for determining how much capacity or
supply will be needed to meet demand
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Graph shown is not a representation of supply and demand but for graphic purposes only
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Two Important Aspects of Forecasts:
1. Expected Level of Demand - is function of
some structural variation, such as a trend or
seasonal variation.
2. Degree of Accuracy that can be assigned to
a forecast (i.e., the potential size of forecast
error). Forecast accuracy is a function of the
ability of forecasters to correctly model demand,
random variation, and sometimes unforeseen
events.
Forecasts are made with reference to a specific time
horizon:
1. Short-term forecasts pertain to ongoing
operations e.g., the next six months, the next year,
the next five years, or the life of a product or service
2. Long-range forecasts can be an important strategic
planning tool. Long- term forecasts pertain to new
products or services, new equipment, new facilities,
or something else 1. that will require a somewhat
long lead time to develop, construct, or otherwise
implement
e.g., urban planning, development plans
Operational tasks that utilizes Forecasting for planning
in anticipation of future operational plans

basis for budgeting

planning capacity
sales
production and inventory
personnel
purchasing

Human
01 Accounting 02 Finance 03 Resources
New product/process cost Equipment/equipment Hiring activities, including
estimates, profit projections, replacement needs, timing recruitment, interviewing,
cash management. and amount of and training; layoff
funding/borrowing needs. planning, including
outplacement counseling.
 Operational tasks that utilizes Forecasting for planning
in anticipation of future operational plans

basis for budgeting

planning capacity
sales
production and inventory
personnel
purchasing

04 Marketing
Pricing and promotion, e-business
strategies, global competition
strategies. New/revised information
systems, internet services.
Product/
05 Operations 06 service design
Schedules, capacity planning, work Revision of current features,
assignments and workloads, inventory design of new products or
planning, make-or-buy decisions, services
outsourcing, project management.
Forecasting is also an important component of yield management, which relates to the percentage of
capacity being used.

Accurate forecasts can help managers plan tactics to match capacity with demand, thereby achieving high-
yield levels. (e.g., iphone models)

There are two uses for forecasts.

1. Plan the system - generally involves long-range plans about the types of products and services to offer,
what facilities and equipment to have, where to locate, and so on.

2. Plan the use of the system - refers to short-range and intermediate-range planning, which involve tasks
such as planning inventory and workforce levels, planning purchasing and production, budgeting, and
scheduling.

Business forecasting pertains to more than predicting demand. Forecasts are also used to predict profits,
revenues, costs, productivity changes, prices and availability of energy and raw materials, interest rates,
movements of key economic indicators (e.g., gross domestic product, inflation, government borrowing), and
prices of stocks and bonds.
 Forecasts are not perfect; actual results usually differ
from predicted values; the presence of randomness
precludes a perfect forecast.

Forecasts for groups of items tend to be more

accurate than forecasts for individual items because
forecasting errors among items in a group usually
have a canceling effect.

Features Common to All Forecasts

Forecast accuracy decreases as the time
Forecasting techniques generally assume that the period covered by the forecast—the time
same underlying causal system that existed in horizon—increases.
the past will continue to exist in the future.
Elements of a Good Forecast
Timely

Accurate

Reliable

Meaningful Units

Writing

Simple to understand and use

Cost Effective
Forecasting and the Chain Supply
STEPS IN THE FORECASTING PROCESS

Determine the purpose of the forecast.

Establish a time horizon.
Obtain, clean, and analyze appropriate data.
Select a forecasting technique.
Make the forecast.
Monitor the forecast errors.
APPROACHES TO FORECASTING
Qualitative Methods Quantitative Methods

consist mainly of subjective inputs, which often defy

involve either the projection of historical data
precise numerical description

permit inclusion of soft information (e.g., human factors,

personal opinions, hunches) in the forecasting process. consist mainly of analyzing objective, or hard, data.
Those factors are often omitted or downplayed when They usually avoid personal biases that sometimes
quantitative techniques are used because they are difficult contaminate qualitative methods.
or impossible to quantify

In practice, either approach, or a combination of both approaches, might be used to develop a forecast.
Qualitative Forecasts
Executive Opinions

Salesforce Opinions

Consumer Surveys

Other Approaches
solicited opinions from other managers and staff people (political or economic condition
Delphi Method
to predict if a certain event will occur
Quantitative Forecasts - Time Series
Trend
Population shifts, changing incomes, and cultural changes account to long-term upward or downward movement in the
data
Seasonality
Restaurants, supermarkets, and theater experience may result to short-term, fairly regular variations
Cycles
Often related to economic, political and agricultural conditions forming wavelike variations of more than one year’s
duration
Irregular variations
Are due to unusual circumstances as severe weather conditions, strikes, or a major change in a product or
servcie
Random variations
are residual variations that remain after all other behaviors have been accounted for
Insights and Experiences
THANK YOU