FORECASTING - Introduction

Operations Management
Forecasting
Chapter 4
ADM 3301 ~ Rim Jaber
Outline
Global Company Profile: Walt Disney Parks and Resorts
WHAT IS FORECASTING?
Forecasting Time Horizons
The Influence of Product Life Cycle
TYPES OF FORECASTS
THE STRATEGIC IMPORTANCE OF FORECASTING
Human Resources
Capacity
Supply-Chain Management
SEVEN STEPS IN THE FORECASTING SYSTEM
Outline - Continued
FORECASTING APPROACHES
Overview of Qualitative Methods

Overview of Quantitative Methods
TIME-SERIES FORECASTING
Decomposition of Time Series

Nave Approach
Moving Averages
Exponential Smoothing
Exponential Smoothing with Trend Adjustment
Trend Projections
Seasonal Variations in Data and Cyclic
Variations in Data (Decomposition Models)
Outline - Continued
ASSOCIATIVE FORECASTING METHODS:
REGRESSION AND CORRELATION ANALYSIS
Using Regression Analysis to Forecast
Standard Error of the Estimate
Correlation Coefficients for Regression Lines
MONITORING AND CONTROLLING FORECASTS
Adaptive Smoothing
Focus Forecasting
FORECASTING IN THE SERVICE SECTOR
Learning Objectives
When you complete this chapter you should be
able to :
1. Understand the three time horizons and which
models apply for each use
2. Explain when to use each of the four
qualitative models
3. Apply the naive, moving average, exponential
smoothing, trend methods, and time series
multiplicative decomposition model
Learning Objectives
When you complete this chapter you should be
able to :
4. Compute measures of forecast accuracy
5. Develop seasonal indices
6. Conduct a regression and correlation analysis
7. Use a tracking signal
WHAT IS FORECASTING?
Process of predicting a
future event
Underlying basis of
all business decisions
Sales will be
$200 Million!
Production
Inventory
Personnel
Facilities
Forecasting is as much of
an art as science
THINKING CHALLENGE
In 1968, Switzerland had a 65%
market share of the worldwide
watch market. Their market
share had increased steadily for
60 years. They had done this
partly by continuously
improving their watches. In
1968, what market share would
you have forecast for 1978?
SOLUTION
10%
Japan had competed with a new
technology, electronic quartz
watches. In 1978, Japans
market share was about 33%.
Yet, Switzerland had invented
the electronic quartz movement.
12:0
5
The bottom line: Forecasting methods are based on past behaviour.

If future behaviour is significantly different from that of the past,
forecasting methods will not work well.
9
Forecasting at Walt Disney Parks

& Resorts
Global portfolio includes parks in Hong Kong,
Paris, Tokyo, Orlando, and Anaheim
Revenues are derived from people how many
visitors and how they spend their money
Daily management report contains only the
forecast and actual attendance at each park
Copyright 2014 Pearson

Canada Inc.

& Resorts
Disney generates daily, weekly, monthly, annual,
and five-year forecasts
Forecast used by labour management,
maintenance, operations, finance, and park
scheduling
Forecast used to adjust opening times, rides,
shows, staffing levels, and guests admitted

Canada Inc.

& Resorts
20% of customers come from outside the USA
Economic model includes gross domestic
product (GDP), cross-exchange rates, arrivals
into the USA
A staff of 35 analysts and 70 field people survey
1 million park guests, employees, and travel
professionals each year

Canada Inc.

& Resorts
Inputs to the forecasting model include airline
specials, Federal Reserve policies, Wall Street
trends, vacation/holiday schedules for 3000
school districts around the world
Average forecast error for the five-year
forecast is 5%
Average forecast error for annual forecasts is
between 0% and 3%
Canada Inc.
FORECAST TERMINOLOGY
Forecasts are to be made through time, into the
future:
The period is the basic time unit (week,
month, quarter, year).
The horizon is the number of periods to be
covered by the forecast.
The interval determines when a forecast is to
be updated.
14
TYPES OF FORECASTS BY
TIME
HORIZON
Short-range forecast
Up to 1 year; usually less than 3 months
Purchasing, job scheduling, workforce levels, job
assignments, production levels
Medium-range forecast
3 months to 3 years
Sales & production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location, research and
development
15
Distinguishing Differences
Medium/long range forecasts deal with more

comprehensive issues and support management
decisions regarding planning and products,
plants and processes
Short-term forecasting usually employs different
methodologies than longer-term forecasting
Short-term forecasts tend to be more accurate
than longer-term forecasts
16
Influence of Product Life Cycle

Introduction Growth Maturity Decline
Introduction and growth require longer forecasts
than maturity and decline
As product passes through life cycle, forecasts
are useful in projecting
Staffing levels
Inventory levels
Factory capacity
Canada Inc.
Types of Forecasts
Economic forecasts
Address business cycle inflation rate, money
supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing products and services

Canada Inc.
Strategic Importance of
Forecasting
Human Resources Hiring, training,
laying off workers
Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
Supply-Chain Management Good
supplier relations and price
advantages
Canada Inc.
STEPS IN THE FORECASTING

PROCESS
The forecast
Step 7 Monitor the forecast

Step 6 Prepare the forecast
Step 5 Gather and analyze data
Step 4 Select a forecasting technique(s)
Step 3 Establish a time horizon
Step 2 Select the items to be forecasted
Step 1 Determine purpose of forecast
20
The Realities!
Most techniques assume an underlying stability
in the system
Forecasts are seldom perfect
Product family and aggregated forecasts are
more accurate than individual product
forecasts(e.g., product line versus individual
products)
Forecast accuracy decreases as the time
horizon increases (flexible organizations with
short response time benefit from more accurate
forecasts than their less flexible competitors)
Canada Inc.
FORECASTING
APPROACHES
Qualitative Methods
Used when situation is
vague & little data exist
New products
New technology
Involves intuition,
experience
Quantitative Methods
Used when situation is
stable & historical data
exist
Existing products
Current technology
Involves mathematical
techniques
22
BREAKDOWN OF
FORECASTING TECHNIQUES
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23
EMPIRICAL RESULTS
Depending upon the situation, judgmental or
quantitative forecasts may be best
Causal (explanatory, associative, econometric)
methods are not necessarily more accurate than
extrapolative (time series) methods
More complex or statistically sophisticated methods
are not necessarily more accurate than simpler
methods
The more information available about the future, the
better
24
ACCURACY
The decision maker needs a measure of accuracy:
To know how far off a forecast might be.
To use as a basis for comparison when choosing among
different alternatives.
To take corrective action if the forecast errors are not
within reasonable bounds.
Two aspects of forecast accuracy when deciding

among forecasting alternatives:
Historical error performance of a forecast
The ability for a forecast to respond to changes
25
HOW TO MEASURE ACCURACY

(Historical Error Performance)
At = Actual observed value at time t

Ft = Forecasted value at time t
Et = At - Ft = forecast Error
t = At/Ft = relative Error
For n periods:
ME = ( Et)/n = Mean Error;
MAD = ( Et )/n = Mean Absolute Deviation;
MSE = ( Et2)/n
= Mean Squared Error.
26
EXAMPLE 1
(Forecaster number 1)
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27
EXAMPLE 1
(Forecaster number 2)
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28
Quantitative Forecasting Methods
Nave approach
Moving averages
Exponential smoothing
Trend projection
Multiplicative/Additive
Models
Linear regression
Time-series
Models
Associative/Causal
models
29

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Operations Management

ADM 3301 ~ Rim Jaber

Overview of Qualitative Methods

Decomposition of Time Series

ADM 3301 ~ Rim Jaber

ADM 3301 ~ Rim Jaber

The bottom line: Forecasting methods are based on past behaviour.

Forecasting at Walt Disney Parks

Copyright 2014 Pearson

Forecasting at Walt Disney Parks

Copyright 2014 Pearson

Forecasting at Walt Disney Parks

Copyright 2014 Pearson

Forecasting at Walt Disney Parks

Medium/long range forecasts deal with more

ADM 3301 ~ Rim Jaber

Influence of Product Life Cycle

Copyright 2014 Pearson

STEPS IN THE FORECASTING

Step 7 Monitor the forecast

ADM 3301 ~ Rim Jaber

Two aspects of forecast accuracy when deciding

HOW TO MEASURE ACCURACY

At = Actual observed value at time t

ADM 3301 ~ Rim Jaber

Quantitative Forecasting Methods

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