Scribd Logo
Upload

Welcome to Scribd!

  • 17 views

    Chapter 4

    Uploaded by

    Girma Melese
    The document discusses forecasting techniques including qualitative and quantitative methods. Qualitative methods include judgmental forecasts using techniques like surveys and Delphi method. Quantitative methods include time series analysis using simple moving average, weighted moving average, and exponential smoothing as well as causal/regression models. Examples are provided to illustrate the techniques.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Chapter 4

    Uploaded by

    Girma Melese
    17 views38 pages
    The document discusses forecasting techniques including qualitative and quantitative methods. Qualitative methods include judgmental forecasts using techniques like surveys and Delphi method. Quantitative methods include time series analysis using simple moving average, weighted moving average, and exponential smoothing as well as causal/regression models. Examples are provided to illustrate the techniques.

    Original Description:

    operations management 4

    Original Title

    4. Chapter 4

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses forecasting techniques including qualitative and quantitative methods. Qualitative methods include judgmental forecasts using techniques like surveys and Delphi method. Quantitative methods include time series analysis using simple moving average, weighted moving average, and exponential smoothing as well as causal/regression models. Examples are provided to illustrate the techniques.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    17 views38 pages

    Chapter 4

    Uploaded by

    Girma Melese
    The document discusses forecasting techniques including qualitative and quantitative methods. Qualitative methods include judgmental forecasts using techniques like surveys and Delphi method. Quantitative methods include time series analysis using simple moving average, weighted moving average, and exponential smoothing as well as causal/regression models. Examples are provided to illustrate the techniques.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 38

    Operations Forecasting

    Chapter Objectives

    At the end of this chapter you will be


    able to:
    • Define the concept and the need for forecasting
    • Describe the qualities good forecast.
    • Explain the steps involved in the forecasting
    process.
    • Identify types of forecasting methods and their
    characteristics.
    Meaning of Operations forecasting
    Forecasting is estimating the future demand for products and
    the resources necessary to produce these outputs.

    Implementing a forecasting system enables you to assess


    current market trends and sales quickly so that to make
    informed decisions about the operations.

    Hence, the starting point for all other forecasts are Sales
    forecasts.

    It becomes an input of both business strategy and production


    strategy. Thus, it is an integral part of planning.
    Why Operations forecasting?

    Forecasting is required to
    determine the following issues
    • What products to produce?
    • What service to offer?
    • How many units to purchase?
    • How many units to produce?
    Features of Good Forecasting

     The forecast horizon must cover the sufficient time


    necessary to implement possible changes.
     The degree of accuracy should be stated.
     The forecast should be expressed in meaningful
    units.
     The forecast should presented in writing.
     The forecast should be simple to understand and
    use, or consistent with historical data intuitively.
    Steps in the Forecasting Process

    “The forecast”

    Step 6 Monitor the forecast


    Step 5 Make 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
    Forecasting Techniques

    Method of forecasting

    Qualitative Quantitative
    techniques techniques
    I. Qualitative Methods
     Qualitative methods :consist mainly of subjective
    inputs
     It based on Judgment of forecaster
    II. Quantitative approaches
    • Forecasts generated through mathematical
    modelling.
     Involves either Time series or Associative
    models
     Time series - uses historical data assuming the
    future will be like the past
     Associative models - uses explanatory variables to
    predict the future.
    Brainstorming question

     Based on your opinion or experience which


    forecasting technique is best?
    I. Qualitative(Judgmental Forecasts)
     Consumer surveys=asking preference
     Delphi method= using experts opinion.
     Executive opinions:- Opinions of managers and
    staff
     Sales force.
     The sales staff is often a good source of information
    because of its direct contact with customers and experience
     Jury of executive opinions
     A small group of upper-level managers may meet
    and collectively develop a forecast
     Relatively quick
     ‘Group-think’
    Forecasts based on judgment, experience or
    opinions are appropriate when:
     Forecasts must be prepared quickly in a short period
    of time
     Available data may be obsolete or up to date
    information might not be available because of rapid
    and continuous changes in the external environment
    such as economic and political conditions
     Historical data cannot be available like demand for a
    newly introduced product, and
     The forecasting period is long range that past events
    will not repeat themselves in a similar fashion
    Types of Quantitative Forecasts

    Time series analysis


    Simple Mean or A verage
    i. Simple Moving Average
    ii. Weighted Moving Average
    iii. Exponential Smoothing

    Associative/causal models
    Regression Analysis
    Simple Mean or Average

    A simple moving average is obtained by summing


    and averaging values from a given number of
    periods repetitively
    Consequently the ‘forecast’ moves by reflecting
    only the most recent values.
    Cont’d
    …
     At 3  ...  At 
    At 1  At  2
    SMA = Ft = n n

    = 
    i 1
    A t i

    Where
    n
    SMA – simple moving average
    Ft - Forecast for period t
    At-i - Actual demand in
    period t-i
    n - Number of periods
    (data points) in the moving
    average
    Example 1:

    A food processor uses a moving average to forecast next month’s demand.

    Past actual demand (in units) is shown in the following table

    Month 1 2 3 4 5 6 7 8
    Actual demand 105 106 110 110 114 121 130 128

    Compute a simple 5 month


    moving average to forecast demand for
    month 9
    Solution

    128130121114110
    a) SMA = F =
    9 9

    5
    = 120.6
    Therefore, the forecasted demand for month 9 is
    120.6.
    ii. Weighted Moving average

    In weighted moving average, the weight is given in


    such a way that more weight is given to the most
    recent value in the time series.

    Ft = WMA = W1At-1+W2.At-2+… +Wn. At-n


    n
    = A t  1 .W i
    Where 
    i 1

    Ft =forecast in time t
    WMA = weighted moving average
    W = weight
    A = Actual demand value
    Example 1

    A department store may find that in a four month period


    the best forecast is derived by using 40% of the actual
    demand for the most recent month, 30% two months
    ago, 20% of three months ago and 10% of four months
    ago. The actual demands were as follows.
    Month Month 1 Month 2 Month 3 Month 4

    Actual Demand 100 90 105 95

    Compute weighted 4-month MA for month 5


    Solutio
    n
    • Compute weighted 4-month MA for month 5

    WMA = 95x0.4+105x0.3+90x0.2+100x0.10

    = 97.5 units
    iii) Simple Exponential Smoothing

    • With simple exponential smoothing, the forecast is


    made up of the last period forecast plus a portion of
    the difference between the last period actual demand
    and the last period forecast.
    Mathematically
    • Ft = F t-1 + α(At-1 - F t-1)

    Where
    • Ft = Forecast for period t
    • Ft-1 = Forecast for the previous period
    • α = Smoothing constant (0< α <1)
    • A t-1 = Actual demand for the previous
    period
    Example
    • The production supervisor at a fibreboard
    plant uses a simple exponential
    smoothing technique (α = 0.2) to forecast
    demand.
    • In May, the forecast was for 20 shipments
    and the actual demand was for 25
    shipments rather than 20. If the actual
    demand for June is 26 shipments,
    forecast the demand for June and July?
    Demand for June
    F = FMay + a (AMay –FMay)
    june
    = 20+0.2(25-20)
    = 21
    The actual for June was 26 shipments
    forecast the demand for July.

    F =F +a(A –F )
    july june june june
    = 21+0.2(26-21)
    = 22
    Casual Forecasting Method
    • Casual forecasting techniques rely on identification of related
    variables that can be used to predict values of the
    variable of interest (demand).

    Casual methods are used when historical data are


    available and there is relationship between the factors to
    be forecasted.
    Example
    • Sales volume are usually related to
     promotion
     Quality
     price
    • Regression :- measures the
    rate of change in one (the
    dependent) variable
    associated with a given
    change in the other
    (independent) variable.
    Simple Linear regression
    In simple linear regression, only one
    independent variable is used and the model
    takes the form

    Y = a + bx

    Where
    • Y = predicted (dependent) variable,
    demand a = value of Y at X = 0
    • b = slope of the line
    The coefficients a and b of the line are obtained by using the formula

    b= n.xy  x.y
    n.x2 
    (x)2
    a=
    y  bx
    n , or y 
    bx of Period Observations
    n = Number
    Example

    The general manager of a building materials


    production plant feels the demand for plaster
    board shipments may be related to the number
    of constructions permits issued in the country
    during the previous quarter. The manager has
    collected the data shown in the accompanying
    table.
    Construction Plaster board
    permits shipments
    15 6
    9 4
    40 16
    20 6
    25 13
    25 9
    15 10
    35 16
    Required:

    Derive a regression forecasting equation?

    Determine plasterboard demand when the number


    construction permit is
    • 30
    • 35
    • 40

    Compute coefficient of determination (r2) and


    interpret the result.
    a) To derive the regression forecasting equation, first let’s find
    the values of the Coefficients a and b

    X Y XY X2 Y2
    15 6 90 225 36
    9 4 36 81 16
    40 16 640 1600 256
    20 6 120 400 36
    25 13 325 625 139
    25 9 225 625 81
    15 10 150 225 100
    35 16 560 1225 256
    x=184 y=80 xy=2146 x2=5006  y2=950
    n = 8 pairs of observation

    n.xy 
    b=
    x.y n.x 2
     (x)2

    8x
    =
    2146184
    2448 x80
    = 619  0.395
    8 x5006
    2
    (184)2
    y  80  0.39(184)
    a = = =
    bx 8 0.915
    n
    Thus, the regression equation is;
    • Y = a + bx

    → Y = 0.915 + 0.395x

    B) plasterboard demand,

    i) if no of permit = 30
    • Y = 0.915 + 0.395 (30) = 12.76

    = 13 shipments
    if number of permit = 35

    Y = 0.915 + 0.395 (35)


    • = 14.74 = 15 shipments

    if number of permit = 40
    Y = 0.915 + 0.395 (40)
    • = 16.75 = 17 shipments
    C) Coefficient of correlation and determination
    n.xy
    Coefficient of correlation (r) =
     n.x2 
    x.y
    x2 ny
    2 2

    8x
    y 
    r=
     
    8 x 950
    2146184x80
    8 x 5006 1842 2

    80 
    
    2448
    x 
    r=
    2,430,400

    r = 0.90  r2 = 0.81
    Interpretation

    * r2 = 0.81 means 81 percent of the total variation in


    plasterboard shipments is explained by construction
    permits.

    What remains is the coefficient of determination (i.e.


    0.19). It indicates that 19% of the total variation, which
    remains unexplained, is due to the factors other than
    the number of construction permit.
    Note: Correlation coefficient, r is a number between -1 &
    1.Correlation coefficient can be positive, zero or negative.

    • r = 1 perfect positive relation.


    • r = 0 lack of any relationship between the two variables. r =-1 perfect
    negative relationship.

    Coefficient of correlation, r overstates the degree of relationship.


    Thus, we use coefficient of determination, r2. Coefficient of
    determination, r2 ranges from 0 and 1, and it is a more objective
    and definitive measure of the degree of relationship.
    End of
    Chapter
    Four!!!

    You might also like