FORECASTING

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Heizer and Render 2010, forecasting is the art and science of predicting the future events. Forecasting is the art because subjective assessment coupled with historical and contemporary is required to improve the accuracy of forecasts. It is a science because a wide variety of numerical methods are used to obtain a number or several number and further analysed using mathematical models to ascertain the accuracy of forecast. Thursday, January 29, 2015 1

Transcript of FORECASTING

Page 1: FORECASTING

Heizer and Render 2010, forecasting is the art and science of predicting the future events.

Forecasting is the art because subjective assessment coupled with historicaland contemporary is required to improve the accuracy of forecasts.

It is a science because a wide variety of numerical methods are used toobtain a number or several number and further analysed usingmathematical models to ascertain the accuracy of forecast.

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STRATEGY IMPORTANCE OF FORECASTForecast is required for all types of industrial activity and specially for the industry which are in the service sector like healthcare and education.

Human Resource – No. of persons required is a function of the productionoutput, depends on demand forecasting. Hence hiring, training and laying offworkers depend on the anticipated demand.

Capacity – Capacity refers to the ability to meet the demand in terms of resourcesand the preparedness on the part of the company. When the demand pattern isrecognised and indicates a rise, the capacity build up happen and ensure no lostsales for want of product.

Supply Chain Management – refers to all the activities that enable the rightproduct at the right place at the right price. Demand forecasting has done withutmost care to identifying the vendors, pricing choices and material options.

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WHY FORECASTING IS REQUIRED ?Forecasting is required for: Production planning. Financial planning. Personnel planning. Scheduling planning Facilities planning. Process design and planning.

Benefits from forecast - Forecasting overcome the uncertainty about thedemand and provides a workable solution. Without the forecast, no productionfunction can be taken up.• Improve employee relations.• Improve material management• Better use of capital and facilities.• Improve customer service

Cost Implications of forecasting – Total cost of forecasting to a minimum,certain uncertainty is acceptable in forecasting. Hence, preparedness for somepossible loss.

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WHY FORECASTING IS REQUIRED ?

Decision making using forecasting – Forecast are subject to uncertainty becauseof the changing environment, any attempt to improve the forecast accuracyincrease the cost but not the accuracy.

Actual decision = Decision assuming forecasting is correct + Allowance forforecast error.

To account the uncertainty and provide allowance, forecast output contains twonumbers as follows1) Best estimates of demand.2) Error. ( Error in forecast is easy to calculate once the actual demand is known).

Forecast error = Actual demand - Forecast demand.

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WHY FORECASTING IS REQUIRED ?

Generate Forecast

Managerial Judgement and Experience

Current Environment

Modify Forecast

New Forecast

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CLASSIFICATION OF FORECASTING PROCESS

According to Heizer and Render 2008, the forecasting methods can be classified into 3 Quantitative ( Statistical forecasting) Qualitative (Subjective estimation )

Based on the forecast time period, the forecasting methods can be classified into 3: Short range – up to 1 year Medium range – 1 to 3 years Long range – 5 years or more.

Based on the methodology, the forecasting methods can be classified into 3: Time- series method. Causal methods Predictive method (Qualitative methods)

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METHOD OF FORECASTING

Qualitative methods

• Market surveys – In this method, the number of respondents and how response are gathered like through oral interviews, personal talks, internet based, Postal ballots etc have to be established before surveys.

• Nominal group testing – The product and services may be given a trial use to a specified group like employees, neighbours etc and their response are collected and analysed.

• Historical analysis – is based on the fact that the past is an indicator of future.

• Jury of executive opinion – The opinion of a group of experts is collected and used as an estimate to obtain the forecast.

• Life cycle analysis – an assessment of the life cycle stage in which the product lies is made first and an opinion is formed.

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METHOD OF FORECASTING

Delphi methods – The experts given their opinions which are collected by the co-ordinator and several round of discussion held before a consensus is reached.

Quantitative methods :

Time series analysis Causal methods

• Moving averages• Exponential moving averages• Box – Jenkins method• Fourier series.

• Regression analysis• Input – output model• Leading indications• Simulations model• Economic models

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SELECTION OF THE FORECASTING METHOD

The right methods of forecasting is based on cost, time and skills are involved, the choice of a forecasting method on several factors are L

Form of forecast required. Forecast horizon, period and interval. Data availability. Accuracy required. Behaviour of process being forecasted Cost of development , installation and operation. Case of operation Management comprehension and cooperation.


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