Chapter III Forecasting.

A. Definition: Estimating the future demand for products

and services and the resources necessary to produce these
outputs.
Forecasting is fundamental to planning.
Planning is the process of setting goals and
choosing the means to achieve these goals

B. Sales forecasting:
Reasons why operations managers must develop forecasts:
1. New facility planning---Requires long range forecasts of
demand for existing products.

2. Production Planning---Rate of production to meet
demand from time to time.

3. Work force scheduling---Necessary to vary work force
levels to meet varying demands, by using overtime, lay-
offs or hiring. Short-range demand forecasts are needed
for this.

4. Financial Planning---Sales forecasts are the driving
force in budgeting. Budgeting is used to plan and control.

C. Types of Forecasts:

1. Long-range Forecast---Provide, operation managers,
with information to make following important decisions:
(a)Selecting a product design, process design, plan for
supply of scarce materials, plan for production
capacity, financial plan for acquiring funds for
capital investment etc.
(b) To build new buildings and to purchase new
machines.
(c ) To develop new sources of materials and new
sources of capital funds.
(d) Planning manpower requirements, training
and personal development.

2. Short-range Forecast---Provide operation
managers with information to make the following
important decisions:
(a) How much inventory of a particular product should
be carried next month?

(b) How much of each product should be scheduled
for production next week?
(c ) How much of each raw material should be
ordered for delivery next week?

(d) How many workers should be scheduled to
work on regular time basis and on overtime basis
next week?

(e) How many maintenance workers should be
scheduled to work next week?
D. A Forecasting Model:

Forecasting begins with information. Forecasts are
possible, only when a history of past data exists. For new
products, forecasting is based on managers skill,
experience, judgement and established techniques.

Data are used to forecast sales in terms of quantity
and value. Sales forecast is translated into demand for
factory capacities, funds, facilities etc.( for long range
forecasting); for workforce, materials, department
requirements, inventories etc.( for intermediate range
forecasting); and specific labour requirement, machine
hours, cash, inventories etc. (for short range forecasting).
E. Forecasting Methods:

1. Quantitative Methods:Analyse demand data by using
time series models like:
(a) Simple Moving Average(SMA)-- Obtained by dividing the
sum of demands for all periods by chosen no. of periods.;

(b) Weighted Moving Average(WMA)Instead of arithmetic
average of past demands, a weighted average of the past demands is
the forecast for the next time period;

(c ) Exponential SmoothingThe forecasted sales for the last
period are modified by information about the forecast error of the last
periods. The weight assigned to a previous period decreases
exponentially as the data gets older.
(d) Regression AnalysisEstablishes relationship between
variablesone dependent and other(s) independent.
Validity of forecast depends upon similarity between
past trends and future conditions.

2. Qualitative or Judgmental Methods: A qualitative
forecast is not exclusively based on mathematical model.
These are useful, when historical data are not available.
The most popular judgmental forecasting methods
are:
(a) Executive committee consensus--- A committee of
executives from different departments is entrusted with the
responsibility of developing a forecast.
(b) The Delphi Method---Seeks to eliminate the
undesirable consequences of group thinking. The Delphi
method draws a pool of experts from both inside and
outside the org. Members are so drawn that, each one is an
expert in one aspect of the problem and none is conversant
with all aspects of the issue. The method proceeds in
following lines:

(i) Each expert in the group makes independent
predictions;
(ii) The coordinator edits these;
(iii) The coordinator provides a series of questions to the
experts;
(iv) Steps (i) to (iii) are repeated several times, till
consensus is obtained.
(c ) Survey of Sales forceIndividual members are
required to submit sales forecasts of their respective
regions. These are combined to form an estimate of sales of
all regions.
This is a popular forecasting method for
companies that have a good communication system in force
and that have a sales force who sell directly to customers.

(d) Historical Analogy---Ties the estimate of future sales of
product to knowledge of a similar products sales..

(e) Market Surveys---Normally preferred for new products
or for existing products to be introduced in new segments.
F. Operations Planning:

It is concerned with the utilization of existing
facilities rather than creation of new facilities. It involves
proper utilization of key resources such as raw materials,
machine capacity, energy etc.

Short term planning takes into account, current
customer orders, priorities, material availability,
absenteeism rate, cash flows etc., and it is designed to
respond quickly to changes in production levels and
market conditions.

Short range planning establishes short range
schedules.
G. Operations Control:

The control functions are:
1. Dispatching---Setting production activities in motion
through the release of orders ( work order, shop order etc.)
and instructions in accordance with the previously planned
time schedules and routings.

Dispatching functions include:
(a) Providing for movement of raw materials from stores
to the first operation and from one operation to the next
operation till all the operations are carried out.

(b) Collecting tools, jigs and fixtures from tool stores and
issuing them to user departments .
(c ) Issuing job orders authorizing operations .
(d) Issue of drawings, specifications, route cards, material
requisitions and tool requisitions to the user departments.

(e) Obtaining inspection schedules and issuing them to the
inspection department.

(f) Internal materials handling and movement of materials
to the inspection area after completing the operation,
moving the materials to the next operation centre after
inspection, and movement of completed parts to the
holding area.
(g) Returning jigs and fixtures and tools to stores after use.

2. Expediting or follow-upExpediting or follow-up or
progressing ensures that, the work is carried out as per the
plan and delivery schedules are met.

Progressing includes activities such as status
reporting, attending to bottlenecks or hold-ups in
production, controlling variations from planned
performance levels, following up and monitoring progress
of work through all stages of production, coordinating
with purchase, stores, tool room and maintenance
departments and modifying production plans, if necessary.


Need for expediting may arise due to the following
reasons:

(a) Delay in supply of materials;

(b) Excessive absenteeism;

(c ) Changes in design specifications;

(d) Changes in delivery schedules initiated by customers;

(e) Breakdown of machines, tools, jigs or fixtures; and

(f) Errors in design drawings and process plans.
3. Criteria of a Good Forecasting Method:
a) Accuracy;

b) Flexibility;

c) Durability;

d) Simplicity;

e) Plausibility---belief in the method;

f) Availability; and

g) Suitability.