UNIVERSITY OF MAKATI

J. P. Rizal Ext., West Rembo, Makati City

COLLEGE OF BUSINESS AND FINANCIAL SCIENCE
Department of Marketing Management
Course Title Title
Module No. 2
Forecasting
Operation Management
with TQM Module Leader
Module Contributors
Timeframe Two weeks
Complete the reading of the Module
How to Complete this
Watch Video Lecture (Module 1 Part 1 and Part 4)
Module?
Participate in Face-to-Face or Online Discussion
Face-to-Face or Online Discussion
Teaching Strategies Upload Video Recorded Lecture to TBL-Hub
Q & A during discussion
INTRODUCTION
Forecasts are a basic input in the decision processes of operations management because they
provide information on future demand. The importance of forecasting to operations management
cannot be overstated. The primary goal of operations management is to match supply to demand.
Having a forecast of demand is essential for determining how much capacity or supply will be
needed to meet demand. For instance, operations need to know what capacity will be needed to
make staffing and equipment decisions, budgets must be prepared, purchasing needs information
for ordering from suppliers, and supply chain partners need to make their plans.
At the end of this module, students will be able to:
LEARNING OUTCOMES

Explain the importance of analyzing and understanding the firm’s external environment.
2. Define and describe the general environment and the industry environment.
3. Discuss the four parts of the external environmental analysis process.
4. Name and describe the general environment’s seven segments.
5. Identify the five competitive forces and explain how they determine an industry’s profit
potential.
6. Define strategic groups and describe their influence on firms.
1. 7. Describe what firms need to know about their competitors and different
methods (including ethical standards) used to collect intelligence about them.
Forecasts are the basis for budgeting, planning capacity, sales, production and inventory,
personnel, purchasing, and more. Forecasts play an important role in the planning process because
they enable managers to anticipate the future so they can plan accordingly.

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, don’t offer discounts) to match capacity with demand, thereby achieving high yield levels.
 Common Features to all Forecasts:

1. Forecasting techniques generally assume that the same underlying causal system that existed
in the past will continue to exist in the future.
2. Forecasts 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.
3. Forecasts for groups of items tend to be more accurate than forecasts for individual items
because forecasting errors among items in a group usually have a canceling effect.
Opportunities for grouping may arise if parts or raw materials are used for multiple products
or if a product or service is demanded by a number of independent sources.
4. Forecast accuracy decreases as the time period covered by the forecast—the time horizon —
increases. Generally speaking, short-range forecasts must contend with fewer uncertainties
than longer-range forecasts, so they tend to be more accurate.
CONTENT
An important consequence of the last point is that flexible business organizations—those that
can respond quickly to changes in demand—require a shorter forecasting horizon and, hence,
benefit from more accurate short-range forecasts than competitors who are less flexible and who
must therefore use longer forecast horizons.

Source: Operations Management 11th Edition by William Stevenson

“For Academic Discussion Purposes Only”

Elements of Good Forecasting System:

Forecasting is one of the most important parts of any manufacturing business. It determines how
many quantities of each item you’re prepared to makes, it can have a hand in planning for budget
and profit for the next year, and it can even determine how much extra equipment you need like
wire shelving, industrial storage, and even staffing levels.

1. Timely - a certain amount of time is going to be needed to respond to a new forecast.

Capacity can’t be expanded overnight, and in order to increase or reduce production to meet
the forecast you’re going to need enough time to reconfigure your equipment and processes.
Accordingly, try to leave enough time in your forecasting to cover any potentially needed
changes.
2. Accurate - this sounds a little obvious, but any forecasting needs to be as accurate and
researched as possible. This will enable any user to plan for possible error, and will provide a
good basis for comparing alternative forecasts.
3. Reliable - similar vein to being accurate, a forecast system needs to produce the same results
every time. Even an occasional error could cause big problems for your overall forecast and
projections, and could leave users with the uneasy feeling that their system isn’t as reliable as
it should be.
4. Correct Units - forecast needs to be in a unit of measurement that is the most meaningful to
whoever will be using it. If the forecast is primarily financial, measuring it in the cost of the
items as opposed to the quantity of items produced will prove more useful, while production
planners need to know how many of each unit will be produced, and so on and so forth.
 5. Understandable - forecasts that are overly complicated tend not to instill a lot of confidence
in users. Make sure your forecasts are thorough enough to cover everything that needs to be
forecasted, but simple enough that new users can get acclimated quickly.

https://www.scribd.com/document/254891629/Elements-of-a-Good-Forecast
“For Academic Discussion Purposes Only”

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 amounts 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. Collect Information. Obtaining the data can involve significant effort. Once obtained, the
CONTENT
data may need to be “cleaned” to get rid of outliers and obviously incorrect data before
analysis.
4. Choose the Forecasting Model. Once all the information is collected and treated, you may
then choose the model you think will give you the best prediction possible. There is not one
single model that works best in all situations, it all depends on the availability and nature of
the available data.
5. Make the Forecast
6. Monitor the forecast. When the time comes, it is very important to compare your forecast
to the actual data. This allows you to evaluate the accuracy of not only the model, but the
entire process, and change each step accordingly.

https://dashboardstream.com/the-6-steps-in-business-forecasting/
“For Academic Discussion Purposes Only”

Approaches/Methods 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.

Qualitative Forecasting:

It is a statistical technique to make predictions about the future which uses expert judgment instead
 of numerical analysis. This method of forecasting depends on the opinions and knowledge of highly
qualified and experienced employees to predict the future outcomes.

1. Executive opinions: The opinions of experts from different departments are considered and
averaged to forecast the future sales. This method of forecasting can be done easily and
quickly without the necessity of elaborate statistics. But the main disadvantage is that it
depends on individual opinions that may not be unanimous and can vary from individual to
individual which could lead to wrong forecasting.
2. Consumer surveys: In this method, the survey is conducted directly on the customers on
their purchases. The surveys can be done through telephone contacts, personal interviews or
questionnaires to obtain data from the customers. This method requires extensive statistical
analysis to test regarding the consumer behavior.
3. Salesforce opinion: In this method, the forecast is done based on the opinions of salespeople
who have steady interactions with the clients. As they are closest to the customers, they can
better predict the requirements of the customers for the future market. The main advantage
of this forecasting method is that it is very simple to use and understand. The information can
CONTENT be segregated easily into different categories. But the drawback is that the salespeople can
be either optimistic or pessimistic about their predictions and this could lead to inaccurate
forecasting.

https://www.chegg.com/homework-help/definitions/qualitative-forecasting-methods-31
“For Academic Purposes Only”

Quantitative forecasting methods:

It is a statistical technique to make predictions about the future which uses numerical measures
and prior effects to predict future events. These techniques are based on models of mathematics
and in nature are mostly objective. They are highly dependent on mathematical calculations.

A. Time-series models – These models examine the past data patterns and forecast the future
on the basis of underlying patterns that are obtained from those data. There are many types
of time series models like Simple and weighted moving average, seasonal indexes, trend
projections, simple mean and exponential smoothing.

A.1 Behaviors to consider in Time-series models:

A.1.1 Trend - refers to a long-term upward or downward movement in the data. Population
shifts, changing incomes, and cultural changes often account for such movements.
A.1.2 Seasonality - refers to short-term, fairly regular variations generally related to factors such
as the calendar or time of day. Restaurants, supermarkets, and theaters experience weekly
and even daily “seasonal” variations.

A.1.3 Cycles - are wavelike variations of more than one year’s duration. These are often related
to a variety of economic, political, and even agricultural conditions.
 A.2 Forecasts based on Time-series models

CONTENT A.2.1 Naive Forecast - forecast for any period that equals the previous period’s actual value. It
uses a single previous value of a time series as the basis of a forecast. The naive approach can be
used with a stable series (variations around an average), with seasonal variations, or with trend.
With a stable series, the last data point becomes the forecast for the next period.

A.2.2 Moving average - technique that averages a number of recent actual values, updated as
new values become available. A moving average forecast uses a number of the most recent
actual data values in generating a forecast. The moving average forecast can be computed using
the following equation:

Example:
 A.2.3 Weighted Moving Average - it is similar to a moving average, except that it assigns more
weight to the most recent values in a time series.

CONTENT

Source: Operations Management 11th Edition by William Stevenson

“For Academic Discussion Purposes Only”

Monitoring Forecast
 Many forecasts are made at regular intervals (e.g., weekly, monthly, quarterly). Because
forecast errors are the rule rather than the exception, there will be a succession of forecast
errors. Tracking the forecast errors and analyzing them can provide useful insight on whether
forecasts are performing satisfactorily.

Possible Source of Error in Forecast

1. Incorrectly identifying the relationship between variables: Identify the correlation between
one variable and another. In reality, there may be more than one variable determining an
outcome.
2. Not recognizing trends in demand: Trends can change quickly and be subtle and therefore be
difficult to observe. Using the wrong trend line is a common mistake.
3. Not updating forecasting assumptions and techniques: You should monitor your forecasting
method on a regular basis to detect any changes in demand patterns. Fundamental shifts in
demand may require you to change your forecasting technique. By monitoring your
forecasting error, you can quickly detect changes in your demand.
4. Projecting past trends into the future: When you use the time-series methods (moving
average and exponential smoothing), you’re making the assumption that past patterns will
continue in the future. This can be dangerous, especially in rapidly changing markets, where
products experience tremendous growth in demand or become obsolete quickly.
5. Reacting to random or special cause variations: Random variation is the natural shifts that
occur from many minor sources. Special cause variation is fluctuation that can be contributed
to an event that doesn’t normally occur, such as a hurricane warning that forces evacuations
and causes a rise in hotel stays in certain areas. Don’t react to these variations, because
they’re unpredictable and nonrecurring.
6. Relying on biased information sources: Sales performance is often measured based on actual
sales as compared to the forecast. If actual sales exceed the forecast, salespeople are often
rewarded, so low forecasts offer them a greater chance of exceeding it. Production staff tend
to prefer high demand forecasts so they have more resources available to meet the
forecasted demand. Always consider the source of information for your forecasts.
7. Using an insufficient number of data points: Using time-series data often requires a
significant amount of data, especially if trends or seasonality conditions exist. What may look
like a pattern in your data could be random variation in demand. You want to make sure you
have enough points to observe the pattern over several seasons. Exactly how much past data
you need depends on the nature of your business.

https://www.dummies.com/business/operations-management/how-to-find-the-source-of-
error-in-your-operations-management-forecast/
“For Class Discussion Purposes Only”
ASSESSMENT
MODULE 2: LEARNING CHECK

1. What are the main advantages that quantitative techniques for forecasting have over
qualitative techniques?

2. What are some of the consequences of poor forecasts? Explain

ASSIGNMENT
MODULE 2: ASSIGNMENT

1. What are the main advantages that quantitative techniques for forecasting have over
qualitative techniques?

2. Explain some of the consequences of poor forecasts?

3. Cite some forecasting problem/s on your chosen company? What solutions will be use to
solve that problem/s?
 RUBRICS

Davis, Aquilano, Chase,: Fundamentals of Operations Management, 3rd Edition, Copyright 2015 by
the McGraw-Hill Book Companies, Inc., Singapore
REFERENCES
Stevenson, William; Operations Management Eleventh Edition, 2012 by McGraw-Hill Book, Inc.
https://www.scribd.com/document/254891629/Elements-of-a-Good-Forecast
https://dashboardstream.com/the-6-steps-in-business-forecasting/
https://www.chegg.com/homework-help/definitions/qualitative-forecasting-methods-31
https://www.dummies.com/business/operations-management/how-to-find-the-source-of-error-in-
your-operations-management-forecast/
https://www.yourarticlelibrary.com/management/forecasting/forecasting-roles-steps-and-
techniques-management-function/70032
https://www.youtube.com/watch?v=fp-1_9mLlbc