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Operations Management

Week-5

Forecasting
Disney Land Case Study Demand Patterns and Forecasting Techniques Design of Forecasting Systems

Forecasting What is it all about ?


Art and science of predicting future events; taking historical data and projecting them into the future with some sort of mathematical model Process of developing the most probable view of what future demand will be, given a set of assumptions about :

Technology Competitors Pricing Marketing Expenditures Sales efforts

Elements of a Good Forecast


Timely

Reliable

Accurate

Written

Types of Forecasts
Qualitative Methods Judgmental - uses subjective inputs Quantitative Methods Time series - uses historical data assuming the future will be like the past Associative models / Econometric / Causal Methods- uses past time series on many relevant variables to produce the forecast for the variable of interest. Basis is the causeand-effect relationship between the variable forecasted and other time series selected. A common method is Regression Analysis

Demand Patterns
The repeated observations of demand in their order of occurrence form a pattern known as time series. Five basic patterns: Horizontal Trend Seasonal Cyclical Random

Steps in Forecasting

The forecast

Step 6 Monitor the forecast

Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique
Step 2 Establish a time horizon Step 1 Determine purpose of forecast

Designing Forecast Methods


Deciding what to forecast Level of Aggregation Units of measurement Choosing the type of technique

1. Judgment Methods
In some cases, these are the only way to make a forecast. In others, these can be used to modify forecasts generated quantitatively. Four types are common:

1) 2) 3) 4)

Salesforce Estimates Executive Opinion Market Research Delphi Method

Are Judgmental Methods always reliable?


We've all heard predictions about the future. Sure, sometimes "experts" are right on target, but check out what they got wrong
"Man will never reach the moon regardless of all future scientific advances." -- Dr. Lee DeForest, Inventor of TV "The bomb will never go off. I speak as an expert in explosive." -- Admiral William Leahy, U.S. Atomic Bomb Project "I think there is a world market for maybe five computers." -- Thomas Watson, chairman of IBM, 1943 "640K ought to be enough for anybody." -- Bill Gates, 1981

"This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." -- Western Union internal memo, 1876

2. Causal Methods
Linear Regression Analysis Reading from the course pack.
Problem: The Renovators construction company renovates old homes in Sacramento. Over time, they have found that companys dollar volume of renovation work is dependent on the Sacramento areas payroll. Management wants to establish a mathematical relationship to help predict sales.!!!!!!!!!!!!!!!!!!!!!!!!