Forecasting

FORECASTI NG
FORECAST
Forecast are basic input decision process of operation management because they provide information on future demand.
The primary
goal of operation management is to match supply and demand.
Two Aspects of Forecast are important:

1) Expected Level of Demand can be a function of some structural variation, such as a trend or seasonal variation.
2) The Degree of Accuracy that can be assigned to a forecast (i.e 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.
TIME HORIZON
Forecast are made with reference to a specific time horizon. The time horizon may be fairly short (e.g. an hour, day, week or month), or somewhat longer (e.g the next six months, the next year, the next five years, or the life of a product or service).
PLANNING PROCESS
Forecast are the basis for budgeting, planning capacity, sales, production and inventory, personnel, purchasing, and more.
Forecast play an important role in the planning process because they enable managers to anticipate the future so they can plan accordingly.
EXAMPLES:
Forecasts affect decisions and activities throughout an organization. Here are some examples:
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 (e.g offer discounts, dont offer discounts) to match capacity with demand, thereby achieving high yield levels.
TWO USES OF FORECAST

1.
Help managers plan the system, and the other is to help them,
Plan the use of the system.
2.
MORE THAN PREDECTING DEMAND
BUSINESS FORECASTING PERTAINS TO MORE THAN PREDICTING DEMAND. 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 GDP, inflation, government borrowing), and prices of stocks and bonds.
NOTE:
BUT THIS REPORT will FOCUS on the forecasting of DEMAND. Keep in mind however that the concepts and techniques apply equally well to the other variables.
FORECASTING is not an exact science.
Successful forecasting often requires a skillful blending of art and science. The responsibility for preparing demand forecast in business organization lies with marketing or sales rather than operations. Operations-generated forecasts often have to do with inventory requirements, resource needs, time requirements, and the like.
FEATURES COMMON TO ALL FORECASTS
A wide variety of forecasting techniques are in use. In many aspects, they are quite different from each other, as you shall soon discover. Nonetheless, certain features are common to all.
1.
Forecasting techniques generally assume that the same underlying causal system that existed in the past will continue to exist in the future.
Forecast are not perfect, actual results usually differ from predicted values; the presence of randomness precludes a perfect forecast. Allowances should be made for forecast errors.
2.
3.
Forecasts for group of items tend to be more accurate than forecasts for individual items because forecasting errors among items in a group usually have a cancelling effects. Forecast accuracy decreases as the time period covered by the forecasts the time horizon increases.
4.
NOTE:
As an important consequence of the last point is that flexible business organization those that can respond quickly to changes in demand- require a shorter forecasting horizon and hence, benefit from more accurate short range forecasts than competitor who are less flexible and who must therefore use longer forecast horizons.
ELEMENTS OF A GOOD FORECAST

A properly prepared forecast should fulfil certain requirements.
TIMELY
ELEMENT 1
The forecast should be timely. Example: Capacity cannot be expanded overnight.
ACCURATE
ELEMENT 2
The forecast should be accurate and the degree of accuracy should be stated.
RELIABLE
ELEMENT 3
The forecast should be
reliable; it should
work consistently.
MEANINGFUL UNITS
ELEMENT 4
The forecast should be expressed in
meaningful units.
IN WRITING
ELEMENT 5
The forecast should be
in writing.
SIMPLE
ELEMENT 6
The forecasting technique should be
simple understand and use.
to
COST EFFECTIVE
ELEMENT 7
The forecast should be cost-effective. The benefits should outweigh the costs.
STEPS IN THE FORECASTING PROCESS

There are six basic steps in the forecasting process:
PURPOSE
STEP 1
Determine the purpose of the forecast. How will it be used and when will it be needed?
TIME HORIZON
STEP 2
Establish a time horizon. The forecast must indicate a time interval, keeping in mind that accuracy decreases as the time horizon increases.
TECHNIQUE
STEP 3
Select a
forecasting technique.
APPROPRIATE DATA
STEP 4
Obtain, clean and analyze
appropriate data.
MAKE
STEP 5
Make the forecast.
MONITOR
STEP 6
Monitor the forecast.
NOTE:
Additional action maybe necessary. For example:

If
demand was much less than the forecast, an action such as a price reduction or a promotion may be needed. Conversely, if demand was much more than predicted, increased output may be advantageous. That may involve working overtime, outsourcing or taking other measures.
FORECAST ACCURACY
ACCURACY
Accuracy and control of forecast is a vital aspect of forecasting, so forecasters want to minimize forecasting errors.
Decision makers will want to include accuracy as a factor when choosing among different techniques, along with cost.
Accurate forecasts are necessarily for the success of daily activities of every business organization.
Some forecasting applications involve a series of forecast (e.g weekly revenues), whereas others involve a single forecast that will be used for a one-time decision (e.g the size of a powerplant). When making periodic forecast, it is important to monitor forecast errors to determine if the errors are within reasonable bounds.
Forecast Error is the difference between the value that occurs and the value that was predicted for a given time period. Hence,
Error
1
= Actual Forecast
1 1
e =A F
Positive Errors result when the forecast is too low, negative errors when the forecast is too high.
Example: If actual demand for a week is 100 units and forecast demand was 90 units, the forecast was too low, the error is 100-90= +10.

Forecasting

Uploaded by

Copyright:

Available Formats

Forecasting

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Forecasting

Uploaded by

Copyright:

Available Formats

FORECASTI NG

goal of operation management is to match supply and demand.

Two Aspects of Forecast are important:

TWO USES OF FORECAST

MORE THAN PREDECTING DEMAND

FORECASTING is not an exact science.

FEATURES COMMON TO ALL FORECASTS

ELEMENTS OF A GOOD FORECAST

The forecast should be timely. Example: Capacity cannot be expanded overnight.

The forecast should be

The forecast should be expressed in

The forecast should be

The forecasting technique should be

simple understand and use.

STEPS IN THE FORECASTING PROCESS

Obtain, clean and analyze

Make the forecast.

Monitor the forecast.

Additional action maybe necessary. For example:

You might also like