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Chapter 3 Part 3

The document discusses three main topics related to forecasting: steps in the forecasting process, forecast accuracy, and approaches to forecasting. It describes the six basic steps to follow in any forecasting process. It also explains that forecast accuracy is important, but errors will always exist due to random variation and complex real-world variables. Forecasting can use qualitative methods based on subjective inputs or quantitative methods that analyze objective historical data or develop models using explanatory variables.

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RJ DAVE DURUHA
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© © All Rights Reserved
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93 views

Chapter 3 Part 3

The document discusses three main topics related to forecasting: steps in the forecasting process, forecast accuracy, and approaches to forecasting. It describes the six basic steps to follow in any forecasting process. It also explains that forecast accuracy is important, but errors will always exist due to random variation and complex real-world variables. Forecasting can use qualitative methods based on subjective inputs or quantitative methods that analyze objective historical data or develop models using explanatory variables.

Uploaded by

RJ DAVE DURUHA
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 3 part 3

The following topics included steps in forecasting, forecast accuracy and approaches to forecasting.
These 3 topics are very essential when it comes to knowing the demand for the accuracy and effectivity
of results

STEPS IN THE FORECASTING PROCESS


There are six basic steps in the forecasting process:
1. Determine the purpose of the forecast. How will it be used and when will it be needed?
This step will provide an indication of the level of detail required in the forecast, the
amount of resources (personnel, computer time, dollars) that can be justified, and the
level of accuracy necessary.
2. Establish a time horizon. The forecast must indicate a time interval, keeping in mind
that accuracy decreases as the time horizon increases.
3. Obtain, clean, and analyze appropriate data. Obtaining the data can involve significant
effort. Once obtained, the data may need to be “cleaned” to get rid of outliers and
obviously incorrect data before analysis.
4. Select a forecasting technique.
5. Make the forecast.
6. Monitor the forecast. A forecast has to be monitored to determine whether it is performing
in a satisfactory manner. If it is not, reexamine the method, assumptions, validity of
data, and so on; modify as needed; and prepare a revised forecast.
Note too that additional action may be 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 and control of forecasts is a vital aspect of forecasting, so forecasters want to minimize
forecast errors. However, the complex nature of most real-world variables makes it
almost impossible to correctly predict future values of those variables on a regular basis.
Moreover, because random variation is always present, there will always be some residual
error, even if all other factors have been accounted for. Consequently, it is important to include
an indication of the extent to which the forecast might deviate from the value of the variable
that actually occurs. This will provide the forecast user with a better perspective on how far
off a forecast might be.
Decision makers will want to include accuracy as a factor when choosing among different
techniques, along with cost. Accurate forecasts are necessary for the success of daily activities
of every business organization. Forecasts are the basis for an organization’s schedules, and
unless the forecasts are accurate, schedules will be generated that may provide for too few or too
many resources, too little or too much output, the wrong output, or the wrong timing of output,
all of which can lead to additional costs, dissatisfied customers, and headaches for managers.
Some forecasting applications involve a series of forecasts (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
power plant). When making periodic forecasts, it is important to monitor forecast errors to
determine if the errors are within reasonable bounds. If they are not, it will be necessary to
take corrective action.

In some instances, historical error performance is secondary to the ability of a forecast to


respond to changes in data patterns. Choice among alternative methods would then focus on
the cost of not responding quickly to a change relative to the cost of responding to changes
that are not really there (i.e., random fluctuations).
Overall, the operations manager must settle on the relative importance of historical performance
versus responsiveness and whether to use MAD, MSE, or MAPE to measure historical
performance. MAD is the easiest to compute, but weights errors linearly. MSE squares errors,
thereby giving more weight to larger errors, which typically cause more problems. MAPE
should be used when there is a need to put errors in perspective. For example, an error of 10
in a forecast of 15 is huge. Conversely, an error of 10 in a forecast of 10,000 is insignificant.
Hence, to put large errors in perspective, MAPE would be used.
APPROACHES TO FORECASTING
There are two general approaches to forecasting: qualitative and quantitative. Qualitative
methods consist mainly of subjective inputs, which often defy precise numerical description.
Quantitative methods involve either the projection of historical data or the development of
associative models that attempt to utilize causal (explanatory) variables to make a forecast.
Qualitative techniques permit inclusion of soft information (e.g., human factors, personal
opinions, hunches) in the forecasting process. Those factors are often omitted or downplayed
when quantitative techniques are used because they are difficult or impossible to quantify.
Quantitative techniques consist mainly of analyzing objective, or hard, data. They usually
avoid personal biases that sometimes contaminate qualitative methods. In practice, either
approach or a combination of both approaches might be used to develop a forecast.
The following pages present a variety of forecasting techniques that are classified as judgmental,
time-series, or associative.
Judgmental forecasts rely on analysis of subjective inputs obtained from various sources,
such as consumer surveys, the sales staff, managers and executives, and panels of experts.
Quite frequently, these sources provide insights that are not otherwise available.
Time-series forecasts simply attempt to project past experience into the future. These
techniques use historical data with the assumption that the future will be like the past. Some
models merely attempt to smooth out random variations in historical data; others attempt to
identify specific patterns in the data and project or extrapolate those patterns into the future,
without trying to identify causes of the patterns.
Associative models use equations that consist of one or more explanatory variables that
can be used to predict demand. For example, demand for paint might be related to variables
such as the price per gallon and the amount spent on advertising, as well as to specific characteristics
of the paint (e.g., drying time, ease of cleanup).
QUALITATIVE FORECASTS
In some situations, forecasters rely solely on judgment and opinion to make forecasts. If
management must have a forecast quickly, there may not be enough time to gather and analyze
quantitative data. At other times, especially when political and economic conditions are
changing, available data may be obsolete and more up-to-date information might not yet be
available. Similarly, the introduction of new products and the redesign of existing products or
packaging suffer from the absence of historical data that would be useful in forecasting. In
such instances, forecasts are based on executive opinions, consumer surveys, opinions of the
sales staff, and opinions of experts.

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