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MB0044-Production and Operations Management

Unit-4 Forecasting

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Program : MBA

Semester : II

Subject Code : MB0044

Subject Name : Production and Operations Management

Unit number : 4

Unit Title : Forecasting

Lecture Number : 4

Lecture Title : Forecasting

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Unit-4 Forecasting

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Production and Operations Management

Objectives:

After studying this unit, you should be able to:

Describe forecasting

Explain the strategic importance, cost implementation and decision making of forecasting

Classify forecasting process

List the methods of forecasting

Explain product life cycle and time series

Describe associative models of forecasting

Explain accuracy of forecasting

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Unit-4 Forecasting

Lecture Outline

Introduction

Strategic Importance of Forecasting

Why Forecasting is Required

Cost Implementations of Forecasting

Decision Making Using Forecasting

Classification of Forecasting Process

Methods of Forecasting

Quantitative Methods

Product Life Cycle

Associative Models of Forecasting

Accuracy of Forecasting

Summary

Check Your Learning

Activity

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Unit-4 Forecasting

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Introduction

Forecasting is the art and science of predicting the future events.

Forecasting may involve taking historical data and projecting them

into the future with some sort of mathematical model.

Forecasting is synonymous with estimating and prediction, though forecasting is considered to be more scientific rather than a crude or vague guesswork.

In this session, you will learn about the importance of forecasting, the

cost implementations of forecasting, the process for decision making

using forecasting, the classifications and methods of forecasting, the

selection of the forecasting method and the associative models of

forecasting.

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Strategic Importance of Forecasting

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Forecasting influences three key activities. They are:

The number of persons required is a function of the production output which, in turn, depends on demand forecasting

Human Resources

Capacity refers to the ability to meet the demand in terms of resources and the preparedness on the part of the company

Capacity

Supply chain management refers to all the activities that enable the right product at the right place at the right price

Supply Chain Management



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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

Forecasting helps to:

Improve employee relations

Improve materials management

Get better use of capital and facilities

Improve customer service



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Cost Implementations of Forecasting

Forecasting requires special efforts and involves inputs from experts which cost a lot to the companies. Well-trained experts and associations substantially invest in human resources and hence charge their clients for the service rendered.

From the above figure, it is understood that to keep the total cost of forecasting to a minimum, it is necessary that the forecasting effort has to be raised up to a level at which certain uncertainty is acceptable and hence, there is preparedness for some possible loss.



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Decision Making using Forecasting

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Forecasts are always subject to uncertainty because of the changing environment and hence, any attempt to improve the forecast accuracy only increases the cost but not the accuracy. Keeping this in mind, the managerial decision makers adopt the following rule: Actual decision = Decision assuming forecasting is correct + Allowance for forecast error The error in forecast is calculated by: Forecast error = Actual demand Forecast Demand

The figure depicts the process of forecasting and the associated factors.



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Classification of Forecasting Process

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The different forecasting methods based on the context or focus are:

Based on type of

database

Quantitative

Qualitative

Based on forecast

time period

Short range

Medium range

Long range

Based on methodology

Time methods

Casual methods

Predictive methods



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Methods of Forecasting

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Time series analysis

Moving averages

Exponential moving averages

Box Jenkins method

Trend projections

Fourier series

Causal methods

Regression analysis

Input output model

Leading indicators

Simulations model

Economic models

Market surveys

Nominal group testing

Historical analysis

Jury of executive opinion

Life cycle analysis

Delphi method

Qualitative methods Quantitative methods



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Quantitative Methods

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Quantitative methods include Time series, Nave method, Moving average method, and Exponential smoothing method. A time series is defined as a set of values pertaining to a variable collected at regular intervals. The figure shown below depicts the components of a time series.

Components of a Time Series



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Product Life Cycle

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The demand for a product keeps changing as it passes through different stages in its life cycle. The demand starts with zero value and keeps rising as the product moves along the life cycle and gradually diminishes once the product is outdated or obsolete. The figure depicts the product life cycle and volume of demand graphically.



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Selection of Forecasting Method

Because cost, time, and skills are involved, the choice of a forecasting

method is based on several factors. They are:

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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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Associative Models of Forecasting

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Regression and correlation techniques are means of describing the association between two or more variables. Two types of regressions are simple and multiple regression. Regression is also categorised as linear and nonlinear regression based on the severity of relationship and characteristics. The following table shows the examples.

Simple Multiple

Linear Y= a +b x Y=a+bx1+cx2+dx3

Non-linear Y= a+bx2 Y=A+BX1+CX22+DX3

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The forecasting procedures using regression involves the following steps: 1. The variables are plotted along Cartesian or rectangular coordinates 2. A trend equation is developed 3. The equation is used for forecasting 4. The variables are not necessarily related on a time basis



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Accuracy of Forecasting

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Several measures of error in forecast have been developed to examine the issue of error in forecast. Here, we look at two widely used and popular measure applicable to a wide variety of methods. These two measures are:

Mean Absolute Deviation

(MAD)

MAD is often used to measure how closely forecast values are matching the actual data.

MAD = Sum of absolute deviations for n periods / number of periods.

Standard Error (SE) of

estimate

The standard error of estimate measures the variability or scatter of the observed values around the regression line.

The formula for

calculating SE is:



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Summary

Forecasting is the art and science of predicting the future events.

The three activities of forecasting are Human resources, Capacity and

Supply chain management.

Forecasting basically helps to overcome the uncertainty about the

demand and thus provides a workable solution.

Forecasting requires special efforts and involves inputs from experts

which cost a lot to the companies.

Forecasting is broadly classified as quantitative and qualitative.

Qualitative methods include Market survey, Delphi method, Historical

analysis and quantitative methods include Time series analysis and

Causal methods.

The two measures of error in forecast developed to examine the issue of

error in forecast are Mean Absolute Deviation and Standard Error of

Estimate.

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Check Your Learning

1. Name the types of forecasting methods?

Ans: The forecasting methods can be classified into:

Quantitative

Qualitative

2. Why is forecasting required?

Ans: Forecasting is required for:

Production planning

Financial planning

Personnel planning

Scheduling planning

Facilities planning

Process design and planning

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Assume that you are the sales manager in a company that manufactures cars. Your company wants to manufacture a SUV for the high-end users and has asked you to prepare a report to forecast sales of SUVs for this segment. What are the factors that you will consider to make this report? Which forecast method will be suitable for this purpose?

Activity

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mb0044 slides unit 04

Documents

planning forecasting

introduction forecasting

forecasting method

accuracy of forecasting

forecasting lecture

previous c o n f i d

materials management

unit title