06-10-2022

DR. A.P.J. ABDUL KALAM TECHNICAL UNIVERSITY, LUCKNOW

FORECASTING

Delivered by
Mohd. Qamar Tanveer
Inderprastha Engineering College, Ghaziabad

Content
• Product Design
• Objectives of Product Design
• Features of a Good Product Design
• Concepts of Product Design
• Steps of Product Design
• Product Design Management
• 4-Pillars of Design Management
• Value & Role of Design Management
• Process Design
• Process Development for Process Design
• Steps for Process Design
• Objectives of Process Design

Industrial Engineering (KME503) 2

1
 06-10-2022

Forecasting
Introduction
• A forecast is an estimate of what is likely to happen in the future.
• Forecasts are concerned with determining what the future will
look like; planning is concerned with what it should look like.
• Forecasting provides a basis for coordinating activities in various
parts of the company.
• Forecasts are an important input to both long-term, strategic
decision-making, as well as for short-term planning for day-to-day
operations.
Industrial Engineering (KME503) 3

Forecasting
Importance
• Finance uses long-term forecasts for capital planning and short-
term forecasts for budgeting.
• Marketing produces sales forecasts for market planning and
market strategy.
• Operations develops and uses forecasts for scheduling, inventory
management, and long-term capacity planning.
• Human Resource Management uses forecasts to estimate the
need for employees.
Industrial Engineering (KME503) 4

2
 06-10-2022

Forecasting
Types
• Demand Forecasts these are estimates of demand for a
company’s goods or services.
• Technological Forecasts These are forecasts concerned with the
rate of change in technology and the impact on a company’s
revenues and/or costs.
• Economic Forecasts predict inflation rates, employment rates,
money supply, housing starts, and other measures of the
performance of an economy.

Industrial Engineering (KME503) 5

Forecasting
Features
• Forecasting techniques assume that the same basic or original
system that existed in the past will exist in the future.
• Forecasts are rarely perfect.
• Forecast accuracy decreases as the time horizon increases.
• Forecasts for groups of items are more accurate than forecasts
for individual items.
• Short term (<1 year) and long term (>1 year)
Industrial Engineering (KME503) 6

3
 06-10-2022

Forecasting
Elements of a Good Forecast
• The forecast should be accurate.
• The forecast should be timely.
• The forecast should be reliable.
• The forecasting technique should be simple to understand and
use.
• The forecast should be expressed in meaningful units.
• The forecast should be in writing.

Industrial Engineering (KME503) 7

Forecasting
Steps
• Determine the purpose of the forecast.
• Select the items to be forecast.
• Establish a time horizon.
• Select the forecasting technique.
• Gather and analyze relevant data.
• Prepare the forecast.
• Monitor the results.
Industrial Engineering (KME503) 8

4
 06-10-2022

Forecasting
Approach
• Qualitative methods
• Quantitative methods
• Forecasts Based on Judgment
• Forecasts Based on Time Series Data

Industrial Engineering (KME503) 9

Forecasting Forecasting

Quantitative Qualitative

Time Series Associative Executive

Salesforce
Naive Techniques Techniques Techniques Simple Multiple
Forecast for Averaging for Trend for Seasonality Linear Regression Linear Regression Opinions

Consumer
Simple Trend Trend and Seasonal
Moving Average Exponential Smoothing Exponential Smoothing Surveys
Weighted
Moving Average
Trend
Projection
Trend
Projection
Market
Research
Simple
Exponential Smoothing
Market
Surveys

Market
Tests

Delphi
Industrial Engineering (KME503) Method 10

10

5
 06-10-2022

Forecasting
Forecasts Based on Judgment
• Executive Opinion A forecasting method in which the opinions and experience of
one or more managers are used to produce a forecast.
• Sales Force Opinion Forecasts compiled from estimates of demand made by
members of a company’s sales force.
• Customer Surveys A forecasting method that seeks input from customers
regarding future purchasing plans for existing products or services.
• Market Research This method tests hypothesis about new products or services
or new markets for existing products or services.
• Delphi Method A forecasting technique using a group process that allows experts
to make forecasts.
Industrial Engineering (KME503) 11

11

Forecasting
Forecasts Based on Time Series Data
• A time series is a sequential series of observations taken at regular intervals over
a period of time.
• The data may be demand (units or rupees), output (units), profits (rupees), or CPI
(indices), among others.
• Analysis of time series data seeks to identify the underlying behaviour of the
series. The underlying behaviour is made up of patterns such as:
• Trend
• Cycles
• Seasonality
• Random variation

Industrial Engineering (KME503) 12

12

6
 06-10-2022

Forecasting
Overview of Time Series Forecasting
• A time series consists of a sequential set of data of a variable, such as
demand.
• There are four possible components of demand:
• Trend . A gradual upward or downward movement of the data over time.
• Cycles. Wavelike variations in the data that occur every several years.
• Seasonality. Short-term, fairly regular variations that are generally related to
weather factors or to human-made factors such as holidays.
• Random Variations. “Blips “ in the data caused by chance and unusual
situations. They follow no discernable pattern, so they cannot be predicted.

Industrial Engineering (KME503) 13

13

Forecasting
Figure 1: Product Demand Charted Over 4 Years with a Growth Trend and Seasonality

Trend
component
Seasonal peaks

Average demand
over four years

Random variation

Year Year Year Year

Industrial Engineering (KME503) 14

14

7
 06-10-2022

Forecasting
Naive Forecasts
• A forecast that assumes that demand in the next period will be equal to
demand in the most recent period.
• Can handle the following components of demand:
• Random variation. The last data point becomes the forecast for the next
period.
• Seasonal variation. The forecast for “this season” is equal to the value of the
series “last season”.
• Trend. The forecast is equal to the last value of the data series, plus or minus
the difference between the last two values.

Industrial Engineering (KME503) 15

15

Forecasting
Causal Forecasting
• Causal forecasting is the technique that assumes that the variable to be
forecast has a cause-effect relationship with one or more other
independent variables.
• Causal techniques usually take into consideration all possible factors that
can impact the dependent variable. Hence, the data required for such
forecasting can range from internal sales data to external data like
surveys, macroeconomics indicators, product features, social chatter, etc.
• Usually causal models are continuously revised to make sure the latest
information is incorporated into the model.

Industrial Engineering (KME503) 16

16

8
 06-10-2022

Forecasting
Regression and Correlation
• Regression analysis is a forecasting techniques that established the relationship
between the variables
• Types
• Positive and Negative
• Simple and Multiple correlation
• Linear and non-linear correlation

Industrial Engineering (KME503) 17

17

Forecasting
Regression Analysis
• The following data relates the cost of the production and sales prices
1986 1987 1988 1989 1990 1991 1992 1993 1994
Costs 203 Type equation here.
216 223 239 248 253 279 301 311
Prices 225 242 250 271 275 277 295 318 329
Cost X Price Y X=x-XJ Y = y-YJ 2
X XY Y
2 ∑ 2273, ∑y 2482, X̅ = 252.56, Y̅ =275.8
203 225 -49.6 -50.8 2456 2516 2578 ∑ 11333, ∑ 9394, ∑ 10246
216 242 -36.6 -33.8 1336 1235 1141
223 250 -29.6 -25.8 874 762 664 ∑
$
239 271 -13.6 -4.8 184 65 23 ∑ ∗∑
248 275 -4.6 -0.8 21 4 1
10246
253 277 0.4 1.2 0 1 1 $
279 295 26.4 19.2 699 508 369 11333 ∗ 9393
301 318 48.4 42.2 2347 2045 1783 10246
$ 0.99
311 329 58.4 53.2 3416 3111 2833 10317.50
252.5556 275.7778 x 11332 10246 9394
2273 2482
Industrial Engineering (KME503) 18

18

9
 06-10-2022

Forecasting
Techniques for Averaging
• These are techniques that are useful for data that has only random
variation.
• These techniques smooth fluctuations in a time series.
• Forecasts that are based on an average are more “stable” than the
original data.
• There are three popular averaging techniques:
• Simple moving average
• Weighted moving average
• Simple exponential smoothing
Industrial Engineering (KME503) 19

19

Forecasting
Moving Average
• A technique that uses a number of historical data values to generate a forecast.
• Involves finding a series of successive averages by dropping the first data value in the series and
adding the last data value.
• Useful for data without trend, seasonality, or cycles.

Weekly Patient Arrivals at a Medical Clinic

450
Patient Arrivals

425

400

375

350
1 4 7 10 13 16 19 22 25 28
Week

Industrial Engineering (KME503) 20

20

10
 06-10-2022

Forecasting
Simple Moving Average
• A key decision involves selecting the number of periods that will be included in the average.
• The larger the number of periods, the greater the smoothing; the smaller the number of periods, the
quicker the forecast reacts to changes in the data.

3-Period 5-Period
Example of Three- and Five-Period Moving Average
MA MA
100
Period Demand Forecast Forecast
1 53 90
2 62

Demand
80
3 84
4 78 66.3 70
5 95 74.7
60
6 75 85.7 74.4
7 66 82.7 78.8 50
8 82 78.7 79.6 1 2 3 4 5 6 7 8 9 10
9 71 74.3 79.2 Period
10 83 73.0 77.8
Demand 3-Period MA 5-Period MA
78.7 75.4

Industrial Engineering (KME503) 21

21

Forecasting
Weighted Moving Average
• A model that applies different “weights” to each value in the moving
average calculation.
• Two key decisions:
• The number of periods that will be included in the average. The larger the
number of periods, the greater the smoothing; the smaller the number of
periods, the quicker the forecast reacts to changes in the data.
• The weight that will be applied to each period. The higher the weight applied to
more recent data, the quicker the model reacts to changes; the lower the weight
that is applied to the more recent data, the greater is the smoothing process.

Industrial Engineering (KME503) 22

22

11
 06-10-2022

Forecasting
Example 2 – Weighted Moving Average Illustration
(Let us continue with the same problem as we had in Example 1.) Market Mixer, Inc. sells can openers. Monthly sales for an eight-month period
were as follows:
Month Sales Month Sales
1 450 5 460
2 425 6 455
3 445 7 430
4 435 8 420
Forecast next month’s sales using a 3-month weighted moving average, where the weight for the most recent data value is 0.60; the next most
recent, 0.30; and the earliest, 0.10.
Solution:
Period Sales Weighted Moving Average Forecast
1 450
2 425
3 445
4 435 (450*.10) + (425*.30) + (445*.60) = 440
Comments:
5 460 (425*.10) + (445*.30) + (435*.60) = 437
1. Any forecasts beyond Period 9 will have the same value as the Period 9
6 455 (445*.10) + (435*.30) + (460*.60) = 451 forecast, i.e., 427.
7 430 (435*.10) + (460*.30) + (445*.60) = 455 3. WMA gives greater weight to more recent values in the moving average
8 420 (460*.10) + (455*.30) + (430*.60) = 441 and is more responsive to recent changes in the data.
9 (445*.10) + (430*.30) + (420*.60) = 427
Industrial Engineering (KME503) 23

23

Forecasting
Simple Exponential Smoothing
• This is a variation of the weighted moving average model.

• Weights are determined by an exponential function which declines as the data gets
older.

• The formula: Ft+1 = aAt + (1 – a)Ft

Industrial Engineering (KME503) 24

24

12
 06-10-2022

Forecasting
Example 3 – Simple Exponential Smoothing Illustration

(Let us continue with the same problem as we had in Example 1.) Market Mixer, Inc. sells can openers. Monthly sales for an
eight-month period were as follows:
Month Sales Month Sales
1 450 5 460
2 425 6 455
3 445 7 430
4 435 8 420
Forecast next month’s sales using exponential smoothing with alpha (a) = 0.30 and the first (starting) forecast = 450.
Solution:
Period Sales Exponential Smoothing Forecast
1 450 450 Comments:
2 425 (.30*450) + (1 - .30)*450 = 450 1. Any forecasts beyond Period 9 will have the same
value as the Period 9 forecast, i.e., 436.
3 445 (.30*425) + (1 - .30)*450 = 443
3. The higher the value of a, the quicker the reaction
4 435 (.30*445) + (1 - .30)*443 = 443 to changes in the data and the less the smoothing.
5 460 (.30*435) + (1 - .30)*443 = 441
6 455 (.30*460) + (1 - .30)*441 = 447
7 430 (.30*455) + (1 - .30)*447 = 449
8 420 (.30*430) + (1 - .30)*449 = 443
9 (.30*420) + (1 - .30)*443 = 436
Industrial Engineering (KME503) 25

25

Forecasting
Cost and Accuracy of Forecasting

Industrial Engineering (KME503) 26

26

13
 06-10-2022

Thank You

Industrial Engineering (KME503) 27

27

14