CHAPTER 7

FORECASTING
Forecasting
• A prediction of what will happen in the future.
• For instance, meteorologist forecast the weather,
businesses attempt to forecast the future
demand for their products and services.
Types of Forecast
• Economic forecast
▫ Predict business cycles by examining such factors as
interest rates, inflation rates, money supplies,
government expenditures and unemployment rates
• Technological forecasts
▫ Concerned with the rates of technological development;
result in product innovations, creating new products or
acquiring new plants and machinery
• Demand forecasts
▫ These are projections of demands for a firm’s products
and services per time period.
Forecasting Time Horizons
• Short-range forecasts
▫ Generally less than 3 months
▫ Used for job scheduling, workforce adjustments, job
assignments, purchasing planning and production
levels.
• Intermediate-range forecasts
▫ Have a time span of 3 months to 3 years
▫ Used in sales planning, production planning,
budgeting and other operating plants
Forecasting Time Horizons
• Short-range forecasts
▫ Generally less than 3 months
▫ Used for job scheduling, workforce adjustments, job
assignments, purchasing planning and production
levels.
• Intermediate-range forecasts
▫ Have a time span of 3 months to 3 years
▫ Used in sales planning, production planning,
budgeting and other operating plants
Forecasting Time Horizon
• Long-range forecasts
▫ Generally 3 years or more
▫ Used in capital expenditure, facility expansion,
new products development and research and
development
Importance Roles of Forecasting
• Forecasts are needed to aid in the utilisation of
company resources
• Demand forecasts allow operations managers to use
production capacity efficiently, reduce customer
response time and cut inventories
• Forecasts are used to anticipate changes in customer
demand, and the price and costs of products and
services
• Demand forecasts help in human resource
management such as hiring, laying off and employee
training and development.
Cont…
• Marketing relies on sales forecasting to introduce
new products and services, compensate sales
personnel and make other marketing plans
• Provide the basis for budgetary planning, cost
control and capital investment
• Forecast may have a significant impact on supply-
chain management
• Managers may need forecast to prepare for changes
in the external environment such new laws and
regulations.
Five Patterns in Demand Time
Series
Demand Pattern Characteristics
Horizontal A horizontal line can estimate the data cluster around a
constant mean and the demand. An example is the daily
shipment of mineral water from the factory, where the
demand for drinking water is quite constant.
Trend A gradual up and down movement in product or service
demand. Examples are the demand for hand phones and
mobile phone services
Seasonal A repeated pattern of increases or decreases in demand
during a season or a year.
Cyclical Less predictable of up and down movement in demand
over a long time span (years or decades). Cyclical patterns
may arise from business cycles, which include factors that
cause the economy to go from recession to expansion and
vice versa, over a number of years.
Demand Characteristics
Pattern
Random Random variations are movements that are irregular and do
not follow any pattern
Factors Affecting Demand
• Generally factors that affect the demand for products and services
can be classified into external or internal.
▫ External factors
 Refer to those existing in the environment outside an organisation and
are beyond the control of management
▫ Internal factors
 Those from within the organisation and are under the control of
management
Examples of external factors Examples of internal factors that
that affect the demand for a affect the demand for a product
product or service are or service are
- Booming economy or recession - Variety of products and services
- Interest rates - Pricing strategies
- Inflation rates - Advertising and promotion
campaigns
- Changes in government policy and - Packaging designs
regulations
- The rate of business failures - Salesperson competency
- Unemployment rates - Product quality
- Population growth rates - Customer services
- Population mobility - Innovation and creativity
- Competitors’ actions and strategies - Research and development
- Changes in consumer tastes and - Fast customer response
attitudes
- Changes in technologies - Flexibility
Designing a Forecasting System
• Steps of Designing and Implementing Forecasting
System
▫ Identify the use of the forecast
▫ Determine the items to be forecasted
▫ Establish the time horizon of the forecast
▫ Choose the type of forecasting technique
▫ Collect information and data needed to make the forecast
▫ Make the forecast
▫ Validate, implement and evaluate the results
Forecasting Approaches
• Two general approaches to forecasting;
▫ Qualitative approach
 Is a subjective and forecasts are generated based on
the decision maker’s intuition, judgment, opinion,
emotions, personal experience, expertise and value
system.
▫ Quantitative approach
 Objective and forecasts are generated based on
mathematical models that rely on historical data.
Qualitative Forecasting Techniques
• Four qualitative forecasting techniques:
▫ Jury of Executive Opinion
 The opinions of a group of experts or managers are pooled and
summarised to arrive at a group estimate of demand.
▫ Delphi Method
 Process of obtaining consensus from a group of experts while
maintaining their anonymity.
 The Delphi method is appropriate for the following purposes:
 Long-range forecasts of product demand
 Sales projections of new products and services
 Technological forecasting
 Changes in society, government policies and competitive
environment
 Long – range economic forecasts.
Cont…
• Sales Force Composite
▫ Sales force composites are forecasts compiled
from demand estimates made periodically by a
firm’s sales personnel.
• Market Research
▫ It is a systematic approach using surveys and
other research techniques to find out consumer
interest in a product or service.
Quantitative Forecasting
Techniques
• Naïve Forecast
▫ The simplest way to make a forecast and it uses only one data
point.
• Simple Moving Averages
▫ A moving average method uses a number of past data values to
calculate an average, which serves as the forecast value for the
next period.
• Weighted Moving Averages
▫ In the simple moving average, each demand data point carries the same
weight in calculating the forecast value
• Exponential Smoothing
▫ Sophisticated weighted-moving average forecasting method that
calculates the average of a time series by giving recent demands more
weight than earlier demands.
END OF CHAPTER 7