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Amity School of Business

FUNDAMENTALS OF PRODUCTIONAND OPERATION MANAGEMENT

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Module II: Forecasting Techniques

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Amity School of BusinessForecasting

The art and science of predicting future events.Forecasts are estimates of timing and magnitudeof the occurrence of future events.

Forecasting is used as a planning tool. Anorganization uses forecasting as a starting pointto the annual business planning exercise.

A good forecasting system will be able to predictthe occurrence of short term fluctuations indemand.

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Amity School of BusinessForecasting Approaches

Quantitative forecasts - Forecasts that

employ one or more mathematical models

that rely on historical data and/or causal

variables to forecast demand.

Qualitative forecastsForecasts that

incorporate such factors as the decision

makers intuition , emotions , personalexperiences.

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Amity School of BusinessQualitative Forecasting Methods

Educated Guess Consensus

Delphi Method

Historical Analogy Market Research

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Amity School of BusinessEducated Guess

An estimate, a guess value based on

experience or theoretical knowledge.

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Amity School of BusinessConsensus

Consensus decision-makingis a group decision making process that

seeks the consent of all participants.

It as an acceptable resolution, one that can be supported, even if not the

"favourite" of each individual.

It has its origin in the Latinword cnsnsus(agreement), which is

from cnsentimeaning literally feel together.

It is used to describe both the decision and the process of reaching a

decision.

Consensus decision-making is thus concerned with the process of

deliberating and finalizing a decision.
http://en.wikipedia.org/wiki/Latinhttp://en.wikipedia.org/wiki/Latin

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Amity School of BusinessDelphi Method

A forecasting technique using a group

process that allows experts to make

forecasts.

Experts give their opinion and a moderator

moderates the discussion till a consensus

is reached.

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Amity School of BusinessHistorical Analogy

Forecasts made on previous years data,

experience, judgement and intuition.

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Amity School of BusinessQuantitative Forecasting

Moving Average

Weighted Moving Average

Exponential Smoothing Linear Regression

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Amity School of BusinessMoving Average

A forecasting method that uses an

average of the n most recent periods of

data to forecast the next period.

This method tends to smooth out short-

term irregularities in the data series.

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1. Donnas Garden supply wants a 3-month

movingaverage forecast , including a

forecast for next January, for shed sales

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Month Actual Shed Sales

Jan 10

Feb 12

Mar 13

Apr 16

May 19

Jun 23

July 26

Aug 30

Sep 28

Oct 18

Nov 16

Dec 14

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Amity School of BusinessWeighted Moving Average

When a detectable trend or pattern is

present, weights can be used to place

more emphasis on recent values.

This practice makes forecasting

techniques more responsive to changes

because most recent periods may be more

heavily weighted.

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2. Donnas Garden supply wants to forecast

storage shed sales by weighting the past

3 months, with more weight given to most

recent data to make them more significant.

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Amity School of BusinessMonth Actual Shed Sales

Jan 10

Feb 12

Mar 13

Apr 16

May 19

Jun 23

July 26

Aug 30

Sep 28

Oct 18

Nov 16

Dec 14

Weights

Applied

Period

3 Last Month

2 Two Months

Ago

1 Three MonthsAgo

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Amity School of BusinessMeasuring Forecast Error

The forecast error tells us how well the

model performed against itself using past

data.

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Amity School of BusinessMean Absolute Deviation

A measure of the overall forecast error for

a model

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Amity School of BusinessMean Squared Error

The average of the squared differences

between the forecasted and observed

values.

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Amity School of BusinessPractice Problem

A manufacturing company hasmonthly demand for one of itsproducts as follows:

Develop a 3-month moving

average forecast and a threemonth weighted movingaverage forecast with weightsof 0.50, 0.30 and 0.20 for themost recent demand values in

that order. Calculate MAD , MSE for each

forecast.

Month Demand

Feb 260

Mar 245

Apr 275

May 290

Jun 300

July 210

Aug 255

Sep 305

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Amity School of BusinessExponential Smoothing

A weighted moving average forecasting

technique in which data points are

weighted by an exponential function.

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1. A firm has experienced the

following demand.

Develop an exponential

smoothing forecast using =0.40

Period Units

1 100

2 200

3 300

4 400

5 500

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Amity School of BusinessPractice Problem

A firm has experienced the

following demand

Develop an exponential

smoothing forecast using =

0.30

Period Units

1 28

2 31

3 28

4 35

5 33

6 32

7 36

8 38

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Regression analysis is a forecasting

technique that establishes a relationship between

variables.

One variable is known, which is used to

forecast the value of an unknown variable.

Regression Analysis

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Amity School of BusinessFactors to be Considered in the

Selection of Forecasting Method

the nature of the business

the nature of data

forecast granularity forecast horizon

shelf life of the model and

the expected accuracy of the forecasts.

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Forecast granularityis the unit of time of eachforecast.

Forecast horizonis the number of time units

into the future for which forecasts are required. For example, weekly forecasts for the next 2months have a granularity of a week and ahorizon of 8 weeks.

Shelf life is the time after which a modelbecomes useless and there is a need to switchto another model.

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Long-RangeCapacity Planning

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Amity School of BusinessDefinitions of Capacity

In general, production capacity is the maximum

production rate of an organization.

Capacity can be difficult to quantify due to

Day-to-day uncertainties such as employeeabsences, equipment breakdowns, and material-

delivery delays

Products and services differ in production rates (so

product mix is a factor) Different interpretations of maximum capacity

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Amity School of BusinessDefinitions of Capacity

The Federal Reserve Board definessustainable practical capacity as thegreatest level of output that a plant can

maintain within the framework of a realistic work

schedule

taking account of normal downtime

assuming sufficient availability of inputs tooperate the machinery and equipment inplace

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Amity School of BusinessDefinition of Production Capacity

Volume of products that can be generated

by a production plant or enterprise in a

given period by using current resources.

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Amity School of BusinessSteps in the Capacity Planning

Process

Estimate the capacity of the present

facilities.

Forecast the long-range future capacity

needs.

Identify and analyze sources of capacity to

meet these needs.

Select from among the alternative sources

of capacity.

9d606pom module 2 (2)

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