Demand Forecasting

Dr. Manoj Gadre

Unit 3 – Syllabus - Production Planning &
Control (PPC)

 Role and Functions of PPC Demand Forecasting:

Forecasting as a Planning Tool, Forecasting Time
Horizon, Sources of Data for forecasting, Accuracy
of Forecast, Capacity Planning.
 Production Planning: Aggregate production
Planning, Alternatives for Managing Demand and
Supply, Master Production Schedule, Capacity
Planning.
 Overview of MRP, CRP, DRP, MRP II. Production
Control: Scheduling, Loading, Scheduling of Job
Shops and Flow Shops, Gantt Charts
Forecasting
Some examples & context

Manufacturing

 Add another product line ovens

 Nature of demand for the range of microwave ovens

Services
 assumptions about the demand for the
facility

Public Policy
 next 10 – 20 years while it formulates long
term plans
Forecasting

 Forecasts are estimates of

 magnitude and

 timing

of uncertain events that happen in every business setting

 Functions of Forecasting

 An estimation tool
 A way of addressing complex and uncertain
environment surrounding business decision-making
 A tool for predicting events related to operations
planning & control
 A vital pre-requisite for the planning process in
organizations
Need for Forecasting
 The key applications of forecasting are:

 Understanding Dynamic & Complex environment

 Managing Short-term fluctuations in production

 Better Materials Management

 Rationalized man-power decisions

 Providing a basis for

▪ Strategic decisions – product line, new capacity, expanding

▪ Planning & scheduling

 Forecasting
Time Horizon
Criterion Short-term Medium-term Long-term
Typical Duration 1 – 3 months 12 – 18 months 5 – 10 Years
Nature of Purely Tactical Tactical as well as Purely Strategic
decisions Strategic

Key Random (short- Seasonal and Long-term trends

considerations term) effects Cyclical effects Business Cycles

Nature of data Mostly Subjective & Largely subjective

quantitative Quantitative
Degree of Low Significant High
uncertainty
Some examples  Revising  Annual  New Product
quarterly Production Introduction
production plans Planning  Facilities Location
 Rescheduling  Capacity decisions
supply f raw Augmentation  New business
material development
Sources of Data
 Field Data
 Sales force estimates
 Point of Sale (POS) Data systems
 Forecasts from supply chain partners
 Secondary data
 Trade/Industry Association Journals
 B2B Portals/Market Places
e.g. business.gov.in, www.tradeportalofindia.com/
 Economic Surveys and Indicators
 Subjective Knowledge
B2B Portal as a source of data
An illustration

Source: http://www.steelexchangeindia.com
Models for forecasting

 Extrapolative Models  Causal or Explanatory Models

 Make use of past data and essentially
prepare the future estimate by some
method of extrapolating the past data
 Examples
▪ Moving Averages – Weighted, Simple
▪ Exponential Smoothening
▪ Time Series Methods
 Analyze the data from a point of
cause – effect relationship
 Examples
 Multiple Regression Models
 Econometric Models
 Technological Forecasting

 Subjective Judgement Methods

 Draw substantially from the expertise of a
group of senior managers using some
collective decision making framework
 Accuracy of Forecasts
Alternative Measures
 Forecast Error (FE):  t  Dt  Ft
n


 Sum of Forecast Errors (SFE):
i
i 1
 Mean Absolute Deviation (MAD): 1 n
MAD  *   i
 Mean Absolute Percentage Error (MAPE): n i 1
1 n i
MAPE  *  * 100
n i 1 Di
 Mean Squared Error (MSE):
1 n 2
 Tracking Signal (TS): MSE  *   i
n i 1
SFE
TS 
MAD
Dt = Demand during period ‘t’, Ft = Forecast during period ‘t’, n = No. of periods
Tracking Signal - Drifting

15.00
13.00
11.00
Tracking Signal value

9.00
7.00
5.00
3.00
1.00
-1.00 0 2 4 6 8 10 12 14 16 18
-3.00
-5.00
Time Period
Capacity Planning
 Capacity denotes in general the extent of
availability of different resources for use by various
processes

 It also denotes the maximum output of products

and services one can achieve using these resources
Cont….

 Capacity planning is a systematic approach

to
 Estimate the amount of capacity required

 Evaluation of alternative methods of augmenting

capacity
 Devise methods to use capacity effectively
Importance Capacity planning

 It has a significant impact on the cost of operation

of the system due to large fixed costs associated
with capacity

 Economies of scale is an concept in

economics related to capacity.
Economies of Scale
An illustration
Average unit cost of output

2000 units
per month
10,000 units
5000 units
per month
per month

Units of output