3/15/2012

Week 5i
PRODUCT

Operations Management
FORECASTING
LECTURE CONTENTS
Forecasting, Time Horizons, Types, Importance, Steps, Misconception about forecasting, Approaches, Forecasting in Services

Instructor

M Salman Bilal
PE, PMP, PMI-RMP

Contents derived primarily from Chapter 17 of the Text Book & Reference Book by Heizer Class Activity from Reference Book by Heizer

Course Progress Part II: PRODUCT (or Service)

Product/Service Design families Week 5 Class Discussion/ Presentation

Forecasting
The product/service Life Cycle PLC, POM as a strategic competitive weapon Process Strategy

Week 6

Class Presentation

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Forecasting
Forecasting is art and science of predicting future events. Forecasting may involve taking historic data and projecting them into future with some sort of mathematical model. May be subjective or intuitive prediction Best is combination of both, i.e., Mathematical model adjusted by managers good judgment and expert opinion There are limits as to what we can expect from forecasts Costly and time consuming Only a few businesses can afford to wait and see the fate of their product or service Most businesses have to do forecasting for better planning

Some Famous Forecasts by trend-setter

I think there is a world market for may be 5 computers
Thomas Watson Chairman of IBM 1943

640 Kb of memory ought to be enough for anybody

Bill Gates 1981

The internet will catastrophically collapse in 1996

Robert Metcalfe Inventor of the internet

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Forecasting in Services
Unusual challenge Major technique in retail sector is tracking demand by maintaining good short-term records. e.g., Barber shop catering men expects peak flows on Fridays & Saturdays Specialty retail facilities such as flower shops, fruit shops may have other unusual demand patterns Fast food restaurants should be well aware not only of weekly, daily and hourly but even thirty minutes variations in demands that influence sales. Therefore detailed forecasts of demand are needed e.g., 18% sales in between 12 -1 pm (Lunch) and the lowest sales between 3-4 pm

Misconception about Forecasting

Seldom Perfect

Forecast
Misconception

Pre-assumption of Stable Plant, Process, Program (Internal)

Self Neutralization of individual & Aggregated Forecasts

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Forecasting Time Horizons

Types of Forecasts
Planning indicators including inflation rates, money supplies, etc, to help organizations to plan medium to long term forecasts

Economic

Technological

Predicting rate of technological progress, which can result in the birth of exciting new products, requiring new plants and equipments

Demand

Projections of the companys Sales for each time period in the planning horizon; further drives a companys production, capacity & scheduling systems and serves as inputs to financial, marketing & personnel planning

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Strategic Importance of Forecasting

Human Resources

Capacity

Supply Chain Management

Steps in Forecasting

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Forecasting APPROACHES
Executive Opinion Delphi Technique Sales-force Composite Consumer Market Survey

QuaLItative

QuaNTItative

Naive Approach (Time Series) Moving Averages (Time Series) Exponential Smoothing (Time Series) Trend Projection (Time Series) Linear Regression (Associative)

Time Series Model

Predicts on the assumption that the future is a function of the Past They look what has happened over a period of time and use a series of Past data to make a forecast Lawn mowers sales predicted on the basis of last year sales in the same months

Associative Model
Incorporate the variables or factors that might influence the quantity being forecast Example; Lawn mower sales might use factors such as new housing start, advertising budget and competitors prices

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QuaNTITative Forecasting Approaches

NAIVE
Assumes that the demand in the next period is equal to demand in the most recent period At least it provides a starting point, against which more sophisticated models, that follow, can be compared Uses an average of the n most recent periods of data to forecast the next period When a detectable trend or pattern is present weights can be used to place more emphasis on recent values Choice of weights is some what arbitrary because there is no set of formula to determine them Basically a weighted moving average forecasting technique Here the data points are weighted by an exponential function

MOVING AVERAGES

EXPONENTIAL SMOOTHING

TREND PROJECTION

That fits a trend line to a series of historical data points and then projects the line into the future of forecast e.g., Projected score of a cricket team

Estimating the Error

Forecasts are ONLY predictions of future values and as such are subject to possible errors. Indeed itd somewhat surprising if the forecast was spot-on. However it can be of great use if some estimate can be made of the likely error. A measure of the overall forecast error for a model The first measure of the overall forecast error for a model is the Mean Absolute Deviation (MAD); (neglecting the sign - all considered positive) MAD = Sum of all errors (taken as positive) / Number of errors

MAD is computed by taking the sum of the absolute values of the individual forecast errors and dividing by the number of periods of data

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