Forecasting

4
PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Twelfth Edition, Global Edition
Principles of Operations Management, Tenth Edition, Global Edition

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Ltd. 4-1

 Learning Objectives
When you complete this chapter you
should be able to :
4.1 Understand the three time horizons and
which models apply for each
4.2 Explain when to use each of the four
qualitative models
4.3 Apply the naive, moving-average,
exponential smoothing, and trend
methods
4.4 Compute some measures of forecasting
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 1. What is Forecasting?
► Process of predicting a
future event
► Underlying basis
of all business
??
decisions
► Production
► Inventory
► Personnel
► Facilities
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 Forecasting Time Horizons
1. Short-range forecast
► Up to 1 year, generally less than 3 months
► Purchasing, job scheduling, workforce levels,
job assignments, production levels
2. Medium-range forecast
► 3 months to 3 years
► Sales and production planning, budgeting
3. Long-range forecast
► 3+ years
► New product planning, facility location,
research and development
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 Distinguishing Differences
1. Medium/long range forecasts deal with more
comprehensive issues and support
management decisions regarding planning
and products and processes
2. Short-term forecasting usually employs
different methodologies than longer-term
forecasting
3. Short-term forecasts tend to be more
accurate than longer-term forecasts

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 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

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 Types of Forecasts
1. Economic forecasts
► Address business cycle – inflation rate, money
supply, housing starts, etc.
2. Technological forecasts
► Predict rate of technological progress
► Impacts development of new products
3. Demand forecasts
► Predict sales of existing products and services

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 2. Strategic Importance of
Forecasting
► Supply-Chain Management – Good
supplier relations, advantages in product
innovation, cost and speed to market
► Human Resources – Hiring, training,
laying off workers
► Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share

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3. Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the
forecast
6. Make the forecast
7. Validate and implement the results
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 The Realities!
► Forecasts are seldom perfect,
unpredictable outside factors may
impact the forecast
► Most techniques assume an
underlying stability in the system
► Product family and aggregated
forecasts are more accurate than
individual product forecasts

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 4. Forecasting Approaches
Qualitative Methods

► Used when situation is vague and

little data exist
► New products
► New technology
► Involves intuition, experience
► e.g., forecasting sales on Internet

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 Forecasting Approaches
Quantitative Methods

► Used when situation is ‘stable’ and

historical data exist
► Existing products
► Current technology
► Involves mathematical techniques
► e.g., forecasting sales of color
televisions
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 Overview of Qualitative Methods

1. Jury of executive opinion

► Pool opinions of high-level experts,
sometimes augmented by statistical
models
2. Delphi method
► Panel of experts, queried iteratively

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 Overview of Qualitative Methods

3. Sales force composite

► Estimates from individual salespersons
are reviewed for reasonableness, then
aggregated
4. Market Survey
► Ask the customer

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 1- Jury of Executive Opinion
► Involves small group of high-level experts
and managers
► Group estimates demand by working
together
► Combines managerial experience with
statistical models
► Relatively quick
► ‘Group-think’
disadvantage

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 2- Delphi Method
► Iterative group
process, continues Decision Makers
(Evaluate responses
until consensus is and make decisions)
reached
► Three types of Staff
(Administering
participants survey)

► Decision makers
► Staff
► Respondents Respondents
(People who can make
valuable judgments)
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 3- Sales Force Composite

► Each salesperson projects his or her

sales
► Combined at district and national
levels
► Sales reps know customers’ wants
► May be overly optimistic

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 4- Market Survey
► Ask customers about purchasing
plans
► Useful for demand and product
design and planning
► What consumers say and what they
actually do may be different
► May be overly optimistic
#
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 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential Time-series
smoothing models
4. Trend projection
5. Linear regression

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 5. Time-Series Forecasting

► Set of evenly spaced numerical data

► Obtained by observing response
variable at regular time periods
► Forecast based only on past values, no
other variables important
► Assumes that factors influencing past
and present will continue influence in
future

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 Time-Series Components

Trend Cyclical

Seasonal Random

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 1- Trend Component
► Persistent, overall upward or
downward pattern
► Changes due to population,
technology, age, culture, etc.
► Typically several years duration

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 2- Seasonal Component
► Regular pattern of up and down
fluctuations
► Due to weather, customs, etc.
► Occurs within a single year
PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN
Week Day 7
Month Week 4 – 4.5
Month Day 28 – 31
Year Quarter 4
Year Month 12
Year Week 52

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 3- Cyclical Component
► Repeating up and down movements
► Affected by business cycle, political,
and economic factors
► Multiple years duration
► Often causal or
associative
relationships

0 5 10 15 20
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 4- Random Component
► Erratic, unsystematic, ‘residual’
fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating

M T W T
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 Naive Approach
► Assumes demand in next
period is the same as
demand in most recent period
► e.g., If January sales were 68, then
February sales will be 68
► Sometimes cost effective and
efficient

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 Moving Averages

► MA is a series of arithmetic means

► Used if little or no trend
► Used often for smoothing
► Provides overall impression of data
over time

∑ demand in previous n periods

Moving average =
n

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 Moving Average Example
MONTH ACTUAL SHED SALES 3-MONTH MOVING AVERAGE
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
August 30 (19 + 23 + 26)/3 = 22 2/3
September 28 (23 + 26 + 30)/3 = 26 1/3
October 18 (26 + 30 + 28)/3 = 28
November 16 (30 + 28 + 18)/3 = 25 1/3
December 14 (28 + 18 + 16)/3 = 20 2/3

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 Weighted Moving Average
► Used when some trend might be
present
► Older data usually less important
► Weights based on experience and
intuition

((
Weighted ∑ Weight for period n Demand in period n
moving =
)( ))
average ∑ Weights

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 Weighted Moving Average
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
May 19
WEIGHTS APPLIED PERIOD
June 23
July 26 3 Last month
2 Two months ago
August 30
September 28 1 Three months ago
6 Sum of the weights
October 18
Forecast for this month =
November 16
December 3 x14
Sales last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago
Sum of the weights

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 Weighted Moving Average
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1/2
August 30 [(3 x 26) + (2 x 23) + (19)]/6 = 23 5/6
September 28 [(3 x 30) + (2 x 26) + (23)]/6 = 27 1/2
October 18 [(3 x 28) + (2 x 30) + (26)]/6 = 28 1/3
November 16 [(3 x 18) + (2 x 28) + (30)]/6 = 23 1/3
December 14 [(3 x 16) + (2 x 18) + (28)]/6 = 18 2/3

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 Potential Problems With
Moving Average
1. Increasing n smooths the forecast but
makes it less sensitive to changes
2. Does not forecast trends well
3. Requires extensive historical data

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 Focus Forecasting
► Developed at American Hardware Supply,
based on two principles:
1. Sophisticated forecasting models are not
always better than simple ones
2. There is no single technique that should be
used for all products or services

► Uses historical data to test multiple

forecasting models for individual items
► Forecasting model with the lowest error used
to forecast the next demand

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 Forecasting in the Service
Sector
► Presents unusual challenges
► Special need for short term records
► Needs differ greatly as function of
industry and product.

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 Home Work-1
Nov. Dec. Jan. Feb. Mar. April
39 36 40 42 48 46

57) What is the forecast for May using a four-month moving average?
A) 38
B) 42
C) 43
D) 44

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 Home Work-2
Nov. Dec. Jan. Feb. Mar. April

37 36 40 42 47 43

What is the forecast for May based on a weighted moving average

applied to the following past demand data

and using the weights: 4, 3, 2 (largest weight is for most recent data)?

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