Forecasting

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

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education Ltd 4-1

 Outline
▶ Global Company Profile:
Walt Disney Parks & Resorts
▶ What Is Forecasting?
▶ The Strategic Importance of
Forecasting
▶ Seven Steps in the Forecasting
System
▶ Forecasting Approaches

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 Outline - Continued
▶ Time-Series Forecasting
▶ Monitoring and Controlling Forecasts
▶ Forecasting in the Service Sector

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 Forecasting Provides a
Competitive Advantage for Disney

► Global portfolio includes parks in Shanghai,

Hong Kong, Paris, Tokyo, Orlando, and
Anaheim
► Revenues are derived from people – how
many visitors and how they spend their
money
► Daily management report contains only the
forecast and actual attendance at each park
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 Forecasting Provides a
Competitive Advantage for Disney

► Disney generates daily, weekly, monthly,

annual, and 5-year forecasts
► Forecast used by labor management,
maintenance, operations, finance, and park
scheduling
► Forecast used to adjust opening times, rides,
shows, staffing levels, and guests admitted

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 Forecasting Provides a
Competitive Advantage for Disney

► 20% of customers come from outside the

USA
► Economic model includes gross domestic
product, cross-exchange rates, arrivals into
the USA
► A staff of 35 analysts and 70 field people
survey 1 million park guests, employees, and
travel professionals each year
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 Forecasting Provides a
Competitive Advantage for Disney

► Inputs to the forecasting model include airline

specials, Federal Reserve policies, Wall
Street trends, vacation/holiday schedules for
3,000 school districts around the world
► Average forecast error for the 5-year forecast
is 5%
► Average forecast error for annual forecasts is
between 0% and 3%

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 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, plants 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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 Product Life Cycle
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position
Hybrid engine vehicles Laptop computers

Boeing 787 Xbox One

DVDs
3D printers

Life Cycle Curve

Electric
vehicles
Apple Video
SmartWatch 3-D game physical
players rentals

Figure 2.5
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 Product Life Cycle
Introduction Growth Maturity Decline
Product design and Forecasting critical Standardization Little product
development Product and Fewer rapid differentiation
critical process reliability product changes, Cost
Frequent product Competitive more minor minimization
and process changes
Strategy/Issues

product Overcapacity in
OMStrategy/Issues

design changes improvements and Optimum capacity the industry

Short production options Increasing stability Prune line to
runs Increase capacity of process eliminate items
High production Shift toward not returning
costs product focus good margin
Limited models Enhance Reduce
Long production capacity
Attention to quality distribution
OM

runs
Product
improvement and
cost cutting

Figure 2.5
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 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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 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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 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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 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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 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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 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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 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 Associative
model

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 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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 Components of Demand
Trend
component
Demand for product or service

Seasonal peaks

Actual demand
line

Average demand
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1

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

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 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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 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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 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
► Can be good starting point

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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

Moving average =
å demand in previous n periods
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 å Weight for period n Demand in period n
moving =
))
average å 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
June WEIGHTS
23 APPLIED PERIOD

July 26 3 Last month

August 30 2 Two months ago

September 28 1 Three months ago

October 18 6 Sum of the weights

November Forecast for

16this month =
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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 Graph of Moving Averages
Weighted moving average (from Example 2)

30 –

25 –
Sales demand

20 –

15 – Actual sales

10 – Moving average
(from Example 1)
5–
| | | | | | | | | | | |

J F M A M J J A S O N D
Figure 4.2 Month

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 Cyclical Variations

▶Cycles – patterns in the data that

occur every several years
▶Forecasting is difficult
▶Wide variety of factors

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 Associative Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in
the dependent variable

Most common technique is linear-

regression analysis

We apply this technique just as we did

in the time-series example

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 Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique

y^ = a + bx

where ^y = value of the dependent variable (in our example,

sales)
a = y-axis intercept
b = slope of the regression line
x = the independent variable

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 Correlation
► How strong is the linear relationship
between the variables?
► Correlation does not necessarily imply
causality!
► Coefficient of correlation, r,
measures degree of association
► Values range from -1 to +1

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 Correlation Coefficient
Figure 4.10
y y

x x
(a) Perfect negative (e) Perfect positive
correlation, r = –1 y y correlation, r = 1

y
x x
(b) Negative correlation (d) Positive correlation

x
(c) No correlation, r = 0

High Moderate Low Low Moderate High

| | | | | | | | |

–1.0 –0.8 –0.6 –0.4 –0.2 0 0.2 0.4 0.6 0.8 1.0
Correlation coefficient values

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 Multiple-Regression Analysis
If more than one independent variable is to be
used in the model, linear regression can be
extended to multiple regression to accommodate
several independent variables

ŷ = a + b1x1 + b2 x2

Computationally, this is quite

complex and generally done on the
computer
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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
► Holidays and other calendar events
► Unusual events

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 Fast Food Restaurant Forecast
Percentage of sales by hour of day

20% –
Figure 4.12

15% –

10% –

5% –

11-12 1-2 3-4 5-6 7-8 9-10

12-1 2-3 4-5 6-7 8-9 10-11
(Lunchtime) (Dinnertime)
Hour of day
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 FedEx Call Center Forecast
12% – Figure 4.12

10% –

8% –

6% –

4% –

2% –

0% –
2 4 6 8 10 12 2 4 6 8 10 12
A.M. P.M.
Hour of day

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