LAGUNA STATE POLYTECHNIC UNIVERSITY

SANTA CRUZ MAIN CAMPUS

OPERATIONS MANAGEMENT
AND TOTAL QUALITY
MANAGEMENT

Prepared by:

ALDON M. FRANCIA, MBA

 LAGUNA STATE POLYTECHNIC UNIVERSITY
SANTA CRUZ MAIN CAMPUS

Module 2:
Forecasting
Prepared by:

Aldon M. Francia, MBA

Introduction
Because they offer data on anticipated
demand, forecasts are a fundamental input in
operations management decision-making
processes. It is impossible to exaggerate the
value of forecasting in operations
management. Supply and demand matching
are the main objective of operations
management. A demand forecast is
necessary to determine how much capacity
or supply will be required to satisfy the
demand. For instance, in order to decide on
workforce levels and equipment purchases,
Introduction
Based on projected future demand,
businesses plan for future operations. Actual
customer orders and forecasts are two possible
sources for estimating demand. Planning is easy
and little to no forecasting is required for
organizations whose anticipated demand is
primarily or entirely made up of client orders.
However, predictions are the primary source of
projected demand for many organizations.
Forecasts should consider two factors. One
is the anticipated level of demand, while the
other is the forecast's level of accuracy (i.e., the
Learning Outcomes
At the end of this module, students should be
able to:

1. list features common to all forecasts;

2. explain why forecasts are generally wrong;
3. list the elements of a good forecast;
4. outline the steps in the forecasting
process;
5. describe the qualitative forecasting
techniques; and
6. describe the key factors and trade-offs to
Lesson 1. Features Common to All
Forecasts
There are several different forecasting
methods in use. They are really
different from one another in a lot of
ways, as you will soon find out. But
everyone shares some characteristics,
therefore it's critical to be aware of
them.

1. The main premise of forecasting

methods is that the same underlying
Lesson 1. Features Common to All
Forecasts
A management cannot just
hand over forecasting to models or
computers and walk away since
unforeseen events can seriously derail
forecasts. Demand can be significantly
impacted by a variety of factors, such
as weather-related occurrences, tax
hikes or decreases, changes in the cost
of rival goods and services, and
changes in tax rates. As a result, a
management needs to be aware of
Lesson 1. Features Common to All
Forecasts
2. The presence of randomness
prevents a perfect forecast, and actual
results frequently diverge from projected
values. Forecasting inaccuracies should be
considered.
3. Because forecasting errors among
items in a group typically have a
canceling effect, forecasts for groups of
items are typically more accurate than
forecasts for individual terms.
Opportunities for grouping may arise if
Lesson 1. Features Common to All
Forecasts
4. As the time horizon (the length of
the forecast's coverage period) grows,
forecast accuracy declines. In general,
short-range projections are more
accurate than long-range forecasts
because they have to deal with fewer
uncertainty. The ability to respond
quickly to changes in demand
necessitates a shorter forecasting
horizon, which allows flexible corporate
organizations to profit from more
Lesson 2. Elements of a Good Forecast

A forecast that has been

adequately developed should meet the
following criteria:

1. The forecast ought to be accurate.

Usually, it takes some time for people
to react to the information in a
forecast. For instance, inventory levels
cannot be rapidly adjusted, nor can
capacity be increased over night.
Lesson 2. Elements of a Good Forecast

2. The forecast must be precise, and

the level of precision must be specified.
Users will be able to prepare for any
inaccuracies thanks to this, and it will
also give them a basis for contrasting
various forecasts.
3. The forecast needs to be accurate
and constant. Users will be hesitant
about using a method if it sometimes
produces accurate forecasts and other
times produces inaccurate ones
Lesson 2. Elements of a Good Forecast

4. The forecast should be given in

understandable units. Production planners
must know how many units will be produced,
financial planners must know how much
money will be needed, and schedulers must
know what equipment and expertise will be
needed. The user's needs determine the
choice of units.
5. A written forecast is required. Even
while it won't be guaranteed, there will be a
greater chance that everyone involved is
using the same information. A documented
Lesson 2. Elements of a Good Forecast

6. The forecasting method should be

easy to comprehend and apply. Users
frequently lack trust in forecasts made
using complex procedures because
they are unaware of both the situations
in which the techniques are appropriate
and their limitations. Technique misuse
is a clear result. It should come as no
surprise that reasonably
straightforward forecasting methods
are often used because consumers find
Lesson 3. Forecasting and the Supply
Chain
Forecasts that are accurate are crucial
for the supply chain. The supply chain may
experience shortages and surpluses as a
result of inaccurate forecasts. Missed
delivery, disruption of operations, and subpar
customer service can result from shortages
of resources, parts, and services. On the
other hand, overly pessimistic predictions
may result in excesses of supplies and/or
capacity, which raises prices. Customer
service is negatively impacted by both
shortages and surpluses in the supply chain,
as are earnings. Furthermore, incorrect
Lesson 4. Steps in the Forecasting
Process
The forecasting process consists of six
fundamental steps:
1. Identify the forecast's objective. When and
how will it be required? How will it be used? This
stage will show how much detail is needed in the
prediction, how much money, computer time,
and human labor may be justified, and how
accurate the forecast must be.
2. Decide on a timeline. The forecast must
provide a time period while keeping in mind that
accuracy declines with increasing time horizon.
3. Collect, purify, and evaluate the proper
data. The data can be obtained with a lot of
Lesson 4. Steps in the Forecasting
Process
4. Pick a forecasting method.
5. Keep track of forecasting errors. To assess
whether the prediction is operating
satisfactorily, the forecast errors should be
tracked. If it isn't, reevaluate the approach,
make any modifications, check the accuracy of
the data, and create an updated forecast.

Also keep in mind that additional action

might be required. For instance, if demand was
significantly lower than expected, a price cut or
promotion may be necessary. In contrast,
increasing output would be useful if demand
turned out to be far higher than expected. That
Lesson 5. Approaches to Forecasting
For qualitative and quantitative
forecasting, there are two general
approaches. Most of the inputs used in
qualitative approaches are subjective
and frequently defy accurate numerical
definition. Quantitative techniques
either require extrapolating previous
data or creating associative models
that aim to forecast using causal
(explanatory) variables.
Lesson 5. Approaches to Forecasting

The forecasting process can incorporate

soft information, such as human aspects,
individual perspectives, and hunches, thanks
to qualitative methodologies. Because they
are challenging or impossible to quantify,
those aspects are frequently left out or
minimized when quantitative techniques are
applied. The essential component of
quantitative approaches is the analysis of
objective, or hard, data. They often steer
clear of personal prejudices, which can
occasionally taint qualitative methodologies.
In actuality, one or both approaches—or a
Lesson 6. Qualitative Forecast
Forecasters occasionally make
predictions simply based on their own
judgment and opinions. There might not be
enough time to obtain and analyze
quantitative data if management needs a
projection immediately. Other times,
particularly when political and economic
circumstances are changing, the information
that is currently available may be outdated
and newer data may not yet be accessible. In
a similar vein, the launch of new items and
the redesign of current products or
packaging are hampered by the lack of
historical data that would be useful for
Lesson 6. Qualitative Forecast
Executive Opinions
A small group of senior managers
might get together and create a prediction,
such as those in marketing, operations, and
finance. This method is frequently applied to
the development of new products and long-
term planning. It provides the benefit of
combining the vast expertise and abilities of
many management. However, there is a
chance that one person's opinion will prevail,
and it's possible that spreading out
responsibility for the forecast between
everyone may make it less pressing to come
up with an accurate prognosis.
Lesson 6. Qualitative Forecast
Salesforce Opinions
Due to their frequent interactions with
customers, members of the sales or customer
service teams are frequently reliable sources of
information. They frequently are informed of any
future plans the clients may have. However, there
are a number of disadvantages to employing
salesforce opinions. One is that employees might not
be able to tell the difference between what clients
would like to do and what they will actually do.
Another is that these folks occasionally overreact to
current events. As a result, their projections may
start to become pessimistic after multiple periods of
poor sales. They could become overly hopeful after
numerous successful sales cycles. Additionally, there
Lesson 6. Qualitative Forecast

Consumer Surveys
It makes sense to ask consumers for
feedback because they are the ones who ultimately
determine demand. However, most of the time there
are either too many clients or no reliable technique
to identify all possible customers. In order to sample
consumer opinions, organizations looking for
consumer input typically turn to surveys of that
population. Consumer surveys can get data that
might not be available elsewhere, which is their
clear advantage. On the other hand, designing a
survey, carrying it out, and accurately interpreting
the findings for accurate information all take a
significant amount of knowledge and expertise. The
cost and effort involved in surveys might be high.
Lesson 7. Choosing a Forecasting
Technique
There are many various sorts of
forecasting methods, and no one method is best
in all circumstances. The manager or analyst
must take a variety of aspects into account while
choosing a technique.
The two most crucial elements are
price and accuracy. How much money has been
set aside to create the forecast? What are the
potential costs of mistakes and what are the
potential rewards of a precise forecast? It is
crucial to carefully consider cost-precision trade-
offs because, in general, the higher the
accuracy, the higher the cost. The best forecast
is not always the most accurate or the cheapest;
Lesson 7. Choosing a Forecasting
Technique
The availability of historical data, the
accessibility of computer software, and the
time required to gather, analyze, and create
the forecast are other factors to consider
when choosing a forecasting technique. The
prediction horizon is crucial since some
strategies work better for short-term
forecasts while others are better suited to
long-term projections.
Lesson 8. Using Forecast Information

A management can approach a forecast in

one of two ways: reactively or proactively.
Forecasts are seen as likely future demand in a
reactive strategy, and managers respond to
satisfy that need (e.g. adjusts production rates,
inventories, the workforce). A proactive strategy,
on the other hand, aims to actively affect
demand (for instance, by advertising, pricing, or
modifications to products or services).
Generally speaking, a proactive strategy
necessitates either an explanatory model (like
egression) or an opinion on the impact on
demand. If the outcomes of the status quo
projection are unacceptable, the management
Lesson 9. Computer Software in
Forecasting

When creating forecasts based on

quantitative data, computers are crucial. By
using them, managers may create and
modify forecasts rapidly and without having
to perform labor-intensive human
calculations. For forecasting, a variety of
software programs are available. The text
website's Excel templates serve as an
illustration of a spreadsheet strategy.
Reference
Operations Management and Total Quality Management (2019).
McGraw-Hill Education. Philippines