CAPE

MANAGEMENT OF
BUSINESS
UNIT 2
Production and
operation management
FORECASTING
TECHNIQUES
LEARNING OBJECTIVES:
1. At the end of this chapter students should be able to:
2. Explain the importance of forecasting
3. Explain the difference between qualitative and
quantitative forecasting techniques
4. Evaluate each of the forecasting techniques normally
used in production planning
5. Calculate moving averages and least squares
regression
 FORECASTING
This is the art and science of predicting future event and may
involve taking historical data and projecting them into the
future with some sort of mathematical model.
Forecasting is a statement about the future
Types of forecasts
1) Economic forecasts: These address the business cycle by
predicting inflation rate, money supplies, housing etc.
2) Technological forecasts are concerned with rates of
technological progress, which can result in the birth of
exciting new products, requiring new plants and equipment
3) Demand forecasts are projections of demand for a company’s
products or services. These forecasts are also called sales
forecasts and drive a company’s production, capacity and
scheduling systems and serve as input to financial marketing
and personnel planning.
CATEGORIES OF FORECAST
1. Short range forecast. This forecast has a time span of
up to one year, but is generally less than three
months. It is used for planning purchasing, job
scheduling, workforce level, job assignment and
production level.
2. Medium range forecast or intermediate forecast
generally span from three months to 3 yrs. It is useful
in sales planning, production planning and budgeting,
cash budgeting and analyzing various operating plans.
3. Long range forecast is generally 3 yrs or more in time
span
see
 APPROACHES TO FORECASTING
There are two general approaches to forecasting. Qualitative
and Quantitative.
qualitative forecast focuses on value judgement and the
individual’s opinions of the future outcomes. The predictions
made by using these techniques are usually subjective and
are normally used when there are no historical data about
the performance of the product – that is, in the early stage
of the product’s lifecycle.
Qualitative forecasting methods are primarily used in
situations where there is no relevant past data on which a
forecast can be based and typically concerned long-term
forecasting.

.
QUALITATIVE FORECAST

•Used when situation is vague & little data exist

•New products
•New technology
•Involves intuition, experience
•e.g., forecasting sales on Internet
 QUALITATIVE FORECASTING METHODS
See Methods
Qualitative

Market Sales Force

Executive Delphi
Survey Composite
Opinion Method
Approach that Approach in
Approach in Approach in
uses interviews which each
which a group of which consensus
and surveys to salesperson
managers meet agreement is
judge preferences estimates
and collectively reached among a
of customer and to sales in his or
develop a forecast group of experts
assess demand her region
QUALITATIVE FORECASTING TECHNIQUES
1 Jury of executive opinion:
This technique takes the opinions of a small group of
high level managers and use them to arrive at a group
estimated demand.
1. Involves small group of high-level managers

2. Group estimates demand by working together

3. Combines managerial experience with statistical

models
4. Relatively quick

5. Group-think’ disadvantage
A FEW DISADVANTAGES OF JURY OF EXPERT OPINION
ARE:

1. Its opinion and experience oriented not based on

facts.
2. There can be biased opinions.
3. The responsibility of the decision is distributed
among all the executives and no single person will be
liable for any faulty forecast.
4. Managers sometimes lack the necessary knowledge
and experience to predict sales accurately
5. There is a possibility that some managers will be
influenced by others in their judgment
SOME ADVANTAGES ARE:

1. This method is useful for a company which is

innovating new products.
2. Very quick and simple process and it is easily done
through holding meetings periodically.
3. Collective decision is been taken considering the
opinions of all the top level executives.
4. Useful for small business because of the simplicity of
this method.
5. The forecast is based on the knowledge and
experience of top executives in the firm
6. It utilises internal managers, which makes it less
expensive
 2. SALES FORCE COMPOSITE.
This is where future demand for a product is arrived at by
adding together what each member of the sales force expects
to be able to sell in his or her territory. In this approach,
each sales person estimates what sales will be in his/her
region. These forecasts are then reviewed added up to arrive
at the total for the period.
 Each salesperson projects his or her sales

 Combined at district & national levels

 Sales reps know customers’ wants

 Tends to be overly optimistic

ADVANTAGES OF SALES FORCE COMPOSITE
1. Relatively inexpensive to get information
2. Information is almost readily available
3. Sales people have direct contact with customers
4. They are knowledgeable about the firm’s product and
competitors’ behaviour
5. Their job responsibilities can enable them to offer
insight about developing marketing trends
6. Since estimates may be used as a benchmark for
salespeople’s performance, they may be underestimated
7. The information received may be limited to a particular
locale and cannot be used generally
8. This technique is based on opinions and not on
statistical data of previous performance
9. They may not have sufficient time to develop an
accurate forecast.
DISADVANTAGES OF SALES FORECAST
a) People are sometimes overly influenced by recent
experiences
b) One may be unable to distinguish between what
customers would like to do and what they actually
will do
c) If forecasts are used to estimate sales quotas, there
will be conflict of interest because it is in the
salesman interest to provide low sales estimate to
ensure that they are realistic. Then they are
combined at the district and national level to reach
an overall forecast.
CONSUMER MARKET SURVEY
This method solicits input from customers or potential
customers regarding future purchasing plans. It is then
used to help in preparing a forecast and also in improving
product design and planning for new products.
a) Ask customers about purchasing plans

b) What consumers say, and what they actually do are

often different
c) Sometimes difficult to answer
ADVANTAGES OF CONSUMER SURVEY
Producers can acquire first-hand information from the
prospective users of the product
The use of a representative sample gives producers the
opinions of buyers from a wide cross-section.
DISADVANTAGES
It may be difficult for some buyers to forecast their
future needs
The result may reflect the subjectivity of a bias research
team.
The intentions of buyers may not transcend into actual
purchase of the product.
DELPHI METHOD.
It involves asking a body of experts to arrive at a
consensus opinion as to what the future holds.
Underlying the idea of using experts is the belief that
their view of the future will be better than that of non-
experts (such as people chosen at random in the street).
In a Delphi study the experts are all consulted separately
to avoid some of the bias that might result were they all
brought together.
The Delphi Method has three distinct features which
determine how it works:
1. Participants are anonymous to each other, so limiting
2. influence
3. Feedback is organised and managed by the firm
4. The final result reflects inputs from all participants.
DELPHI METHOD ADVANTAGES:
(i) Objective forecast is accurate.
(ii) Useful foe technology, new product, and industry sales
forecast.
(iii) Both long and short term forecastin possible.
There is no need to conduct face-to-face interviews,
which can be difficult to arrange
Participants opinions are not influenced by each other
or by a dominant individual
Participants have time to think about their responses
carefully and thoroughly
The interpersonal issues of struggle for power,
personality clashes or leadership problems are
eliminated since there is no physical meeting
DISADVANTAGES
i Difficulty getting a panel experts.
ii Longer time for getting consensus.
iii Break-down of forecast into products or territories is
not possible.
iv The quality of the results is linked to the quality of
the panel used for the forecast
v A poor survey instrument may hamper the research
process and the information being sought
vi. The method is usually time consuming and expensive
vii There is still a possibility of panel members being
indirectly influenced to side with the majority.
 LESSON REVIEW
1. Forecasts
a. become more accurate with longer time horizons
b. are rarely perfect
c. are more accurate for individual items than for groups of items
d. all of the above
e. none of the above
2. One purpose of short-range forecasts is to determine
a. production planning c. inventory budgets
b. research & development plans d. facility location
3. The two general approaches to forecasting are
a. qualitative & quantitative c. mathematical & statistical
b. judgmental & qualitative d. historical and associative
e. judgmental and associative
4. Which of the following is not a type of qualitative forecasting?
a. executive opinions c. sales force composites
c. consumer surveys d. moving average
5. The forecasting model that pools the opinions of a group of
experts or managers is known as the
a. sales force composition c. jury of executive opinion
b. consumer market survey d. management coefficients
6. Forecasts used for new product planning, capital expenditures,
facility location or expansion, and R&D typically utilize a
a. short-range time horizon c. medium-range time horizon
b. long-range time horizon d. all of the above
7. Which of the following is not a step in the forecasting process?
a. determine the use of the forecast
b. eliminate any assumptions
c. determine the time horizon
d. select a forecasting model(s)
e. validate and implement the results
8. Which of the following uses three types of participants:
decision makers, staff personnel, and respondents?
a. executive opinions c. sales force composites
b. the Delphi method d. consumer surveys
QUANTITATIVE TECHNIQUE METHODS:

These types of forecasting methods are based on

mathematical (quantitative) models, and are objective in
nature. They rely heavily on mathematical computations.
Quantitative forecasting techniques is used when
situation is ‘stable’ & historical data exist:
•Existing products
•Current technology
•Involves mathematical techniques
•e.g., forecasting sales of color televisions
QUANTITATIVE FORECASTING METHODS

seeMETHODS
QUANTITATIVE

Associative Models
Time-Series Models
Associative models (often
Time series models look at
called causal models) assume
past patterns of data and
that the variable being
attempt to predict the
forecasted is related to other
future based upon the
variables in the environment.
underlying patterns
They try to project based
contained within those data.
upon those associations.
QUANTITATIVE METHODS
•Time Series & Regression
•Time Series Popular Forecasting Approach in
Operations Management
•Assumption:
•“Patterns” That Occurred in the Past Will Continue to
Occur In the Future
•Patterns
1. Random Variation

2. Trend

3. Seasonality

4. Composite
WHAT IS A TIME SERIES?
1. Obtained by observing response variable at regular
time periods
2. Set of evenly spaced numerical data
3. Forecast based only on past values
4. Assumes that factors influencing past and present will
continue influence in future
5. Assumes that factors influencing the past will
continue to influence the future
TIME-SERIES MODELS
see Models
Time-Series

Simple Simple Weighted

Exponential
Mean Moving Moving
(Average) (Average) (Average) Smoothing

Trend Seasonal
Projection Indexes
SIMPLE MEAN (AVERAGE)
Uses an average of all past data as a forecast
The average of all available data - good for level patterns
SIMPLE MOVING AVERAGE
Uses an average of a specified number of the most recent
observations, with each observation receiving the same
emphasis (weight)
 The average value over a set time period
(e.g.: the last four weeks)
 Each new forecast drops the oldest data point & adds a
new observation
 More responsive to a trend but still lags behind actual
data
Moving averages is particularly useful when demand for
the product is fluctuating because it removes the effects of
these random fluctuations. Since the technique is taking
an average of a subset of data, it eliminates the
fluctuation while creating a forecast.
 SIMPLE MOVING AVERAGE EXAMPLE
Calculate a FOUR period moving average forecast using
the information below
Month Sales
1 42
2 40
3 43
4 40

Month 5 Sales = The sum of the four period ÷ the # of periods

= (42 + 40 + 43 + 40) ÷ 4
=
Calculate month 6 sales using the information above.
EXAMPLE
The Freewheel motorcycle dealer in the Chicago area wants to
be able to forecast accurately the demand for the Freewheel
Super Z12 motorcycle. From sales records, the dealer has
accumulated the following data for the second half of 2019.
Month Sales
July 10
August 15
September 23
October 44
November 54
December 36
a. Compute a 3-month moving average forecast of demand for
January 2020.
b) Compute a 5-month moving average forecast of demand for
January 2020.
ADVANTAGES OF MOVING AVERAGE
(i) Relatively simple method.
(ii) Easy to calculate
(iii) Widely used for short term and medium term sales
forecasts.
(iv) Eliminates the problem of fluctuation in data when
forecasting
(v) Smooths the data, thus giving a clearer picture on
the current trends – that is, it gives a clearer picture of
trends than actual sales figures
(vi) It is a fairly accurate forecasting technique
DISADVANTAGES OF MOVING AVERAGE
(i) Unable to predict a downturn or upturn in the
market.
(ii) Cannot predict long term sales forecast accurately
(iii) Historical data is needed.
(iv) Does not recognise complex relationship in the data
(v) Tends to lag trends in data
(vi) Its calculation can become fairly complex especially
where there is no prior knowledge.
WEIGHTED MOVING AVERAGE
All weights must add to 100% or 1.00
e.g. Ct .5, Ct-1 .3, Ct-2 .2 (weights add to 1.0)
Allows emphasizing one period over others; above
indicates more weight on recent data (Ct =.5)
Differs from the simple moving average that weighs all
periods equally - more responsive to trends
WEIGHTED MOVING AVERAGE
Compute a weighted average forecast using a weight of 0.4
for the most recent period, 0.3 for the next most recent, 0.2
for the next and 0.1 for the next.
Month 5 Sales
Month Sales
40 x 0.4 = 16
1 42 43 x 0.3 = 12.9
2 40 40 x 0.2 =8
3 43 42 x 0.1 =4.2
4 40 Total = 41.1
Using the information what would be month 6 forecast
Sales.
(41.1 x .4) + (40 x .3) + (43 x .2) + (40 x .1) =
EXAMPLE WEIGHTED MOVING AVERAGE
The Freewheel motorcycle dealer in the Chicago area wants to
be able to forecast accurately the demand for the Freewheel
Super Z12 motorcycle. From sales records, the dealer has
accumulated the following data for the second half of 2019.
Month Sales
July 10
August 15
September 23 x 0.15 =
October 44 x 0.2 =
November 54 x 0.3 =
December 36 x 0.35 =
a. Compute a weighted moving average forecast using a
weight of 0.35 for the most recent period, 0.3 for the next
most recent, 0.2 for the next and 0.15 for the next, demand
for January 2020.
b. Compute a weighted moving average forecast using a
weight of 0.30 for the most recent period, 0.25 for the next
most recent, 0.2 for the next period, 0.15 and 0.10 for the
next, demand for January 2020.
NAÏVE FORECASTING
Uses last period’s actual value as a forecast. This is where
the forecast for any period equals the previous period’s
actual value. Fore example if demand for last week was
1000 cans of corn beef, then the naïve forecast for the
upcoming week is 1000 cans of corn beef.
CHARACTERISTICS
1. Uses a single previous value of a time series as the
basis of a forecast.
2. Virtually no cost
3. Data analysis is nonexistent
4. Easily understandable
5. Cannot provide high accuracy
6. If it were true, future will always be the same as the
past
ADVANTAGES AND DISADVANTAGES OF NAÏVE
FORECASTING
Advantages of Naïve Forecast
1. Simple to calculate.
2. It has no cost
3. It is quick and easy to prepare because data analysis is
non existent
4. It is easy to understand
5. Accuracy is good in short-term forecast.

Disadvantage
1. It can be highly inaccurate
2. Cannot be used for long-term and new products.
3. Accuracy of sales forecast would be less, if past sales
fluctuate
4. considerably.
EXPONENTIAL SMOOTHING
This is a forecasting method in which the forecaster can
allow sales in certain periods to influence the sales
forecast more than the sales on other periods
New forecast = Last period’s forecast + L(Last period’s
actual demand - Last period’s forecast)
By using a smoothing constant (L) in the equation:
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant L = .20
New Sales = 142 + L x (153 – 142)
= 142 + 2.2
= 144.2
Advantages
(i) Simple to operate.
(ii) Forecasters knowledge or intuition can be used in
forecasting.
(iii) Useful method when sales date have a trend or a
seasonal pattern.
(iv) Immediate response to a upturn or downturn in sales.
(v) Used by many firms.
Disadvantage
(i) Long term and new product forecasting are not
possible.
 LESSON REVIEW
1. Which of the following is not a type of qualitative forecasting?
a. executive opinions c. moving average
b. consumer surveys d. the Delphi method
2. Time-series data may exhibit which of the following behaviors?
a. Trend d. random variations
b. Seasonality e. cycles
c. all of the above
3. In time series, which of the following cannot be predicted?
a. large increases in demand c. technological trends
b. seasonal fluctuations d. random fluctuations
4. What is the approximate forecast for May using a four-month
moving average?
Nov. Dec. Jan. Feb. Mar. April
39 36 40 42 48 46
a. 38 c. 42
b. 43 d. 44
5. Which time series model below assumes that demand in the
next period will be equal to the most recent period's demand?
a. naive approach
b. moving average approach
c. weighted moving average approach
d. exponential smoothing approach
6. Which time series model uses past forecasts and past
demand data to generate a new forecast?
a. Naïve c. Moving average
b. Weighted moving average d. Exponential smoothing
7. Gradual, long-term movement in time-series data is called
a. Seasonal variation c. Cycles
b. Trends d. Exponential variation
8. Which of the following is not present in a time series?
a. Seasonality c. Operational variations
b. Trend d. Cycles
 HOW TO
PRODUCE?
LEARNING OBJECTIVES:
1. Discuss the different product design strategies
2. Discuss the elements and concepts that are associated
with capacity planning
3. Explain the concepts of economies and diseconomies of
scale
4. Assess the main types of layout strategies that are
used by businesses
HOW TO PRODUCE?
 Labour Intensive
 Capital Intensive
LABOUR INTENSIVE PRODUCTION
This is when products are mainly produced by human
workers. Machines and special tools may be used too, but
overall it requires human creativity and effort to produce
the product.
Examples of labour intensive production

1. Food processing (e.g. ready meals)

2. Hotels & restaurants (Hospitality)
3. Fruit farming / picking
4. Hairdressing & other personal services
5. Coal mining
6. Agriculture
ADVANTAGES OF LABOUR INTENSIVE
PRODUCTION
1. Staff(labour), unlike machinery can be used flexibly to meet
changing levels of consumer demand, e.g. temporary
workers.
2. Can provide a ‘personal touch’ and be more in-tune with
customer needs and wants.
3. Can provide tailor made products / services for different
customer needs and wants. Machinery is not flexible enough
to provide custom made products / services for individual
customers. (Job Production)
4. Labour can provide feedback, that provides ideas for
continuous improvement. Workers can adapt to introduce
new ideas.
5. Labour is always required to takeover in any event of
breakdown of machinery.
DISADVANTAGES OF LABOUR INTENSIVE
PRODUCTION

1. Relatively expensive in the long-term when compared to

machinery – higher per unit costs due to lower levels of
productivity.
2. Relatively inefficient and inconsistent levels of effort.
3. Labour relation problems, e.g. may go on strike.
4. There could be a shortage of skilled labour, unlike
machinery.
5. Problems in personal life could easily affect the
performance at work.
CAPITAL INTENSIVE PRODUCTION
Capital intensive is when products are mainly produced
by machines and robots. Capital-intensive processes are
those that require a relatively high level of capital
investment compared to the labour cost. These processes
are more likely to be highly automated and to be used to
produce on a large scale. An industry that is capital
intensive is oil refining, manufacturing.
Capital intensive

Oil extraction & refining

Car manufacturing
Web hosting
Intensive arable farming
Transport (airports, railways etc)
ADVANTAGES OF CAPITAL INTENSIVE
PRODUCTION

1. Reduces human error – more accurate production.

2. Greater speed (efficiency) and uniform effort / output.
3. Technical economies of scale – increased efficiency
which could reduce average cost.
4. No problems with labour shortages / planning labour.
DISADVANTAGES OF CAPITAL INTENSIVE
PRODUCTION

1. Initial high costs of investment and possible training

costs.
2. Lack of flexibility in responding to a change in demand.
In contrast, labour can be used flexibly, e.g. using
temporary workers.
3. Machinery lacks initiative, e.g: it is unlikely to be
innovative, provide ideas on how to improve production
or take on extra responsibilities.
Differences between Labour intensive and Capital
intensive method of production

LABOUR INTENSIVE CAPITAL INTENSIVE

Costs of labour are a higher

proportion of total costs than costs
of capital e.g hand worked farm
Benefits Mass production requires large
Can produce one-off unique scale output using repeated task.
products Machine can deliver this much
Well suited to deliver personal more quickly than labour
services Enables the business to enjoy
Lower productions costs especially economies of scale
when labour is cheaper in that area Increased labour productivity
Low start-up costs Skills level may be lower so costs
Relatively easy to vary labour force are less and it is easier to recruit
(recruit/ retrench) employees.
Product Development is about the creation of new ideas
that people will buy. It includes appearance and
function, and needs the balance of science and art for its
success.
PRODUCT DESIGN PLANNING
Product design can be defined as the idea generation,
concept development, testing and manufacturing or
implementation of a physical object or service. Product
Designers conceptualize and evaluate ideas, making them
tangible through products in a more systematic approach.
Designing new product involves choices and decisions,
which may have an effect reaching far beyond an
individual designer. The design process is affected by:

a) Manufacturing process
b) Consumer habits
c) Project stakeholders
d) Organisation that provide the required designs.
PRODUCT MODULARISATION
These are parts of a product or sub-assemblies that can
easily be added to or subtracted from a complete product
to give a new product that can be marketed to customers.
One advantage of modular design of equipment compared
with non-modular design is that failures are often easier
to diagnose and remedy, because there are fewer pieces to
investigate.
ADVANTAGES OF MODULARISATION
a) A wider range of products can be offered than possible
under traditional standardization.
b) It gives designers flexibility in meeting the needs of
different market segments.
c) Product updating is easier. Instead of designing and
producing a totally new product just one or two modules
can be updated to allow the final product to be re-launched
as a newer version.
d) The ease of design and testing means each module can be
designed and tested separately before final assembly.
e) It allows companies the benefits of economies of scale.
f) Easier repair and replacement as the faulty module is
conveniently removed and replaced with a good one
g) Training cost is less
h) Inventory control becomes more routine.
MINIATURISATION
This refers to the trend towards smaller and smaller
products, often electronic products that have the capacity
to contain an increasing number of features.
ADVANTAGES OF MINIATURISATION
a) easier to handle products for consumers
b) more features and potential power in smaller units
c) less environmental damage as tiny products take
fewer scarce resources to produce and they create less
waste when disposed of quicker and cheaper
manufacturing processes
DISADVANTAGES OF MINIATURISATION
1. While there are cost savings on materials, those for
research and development and the cost of technology
might increase
2. The production process is highly dependent on
machinery and automation.
COMPUTER-AIDED DESIGN (CAD)
This involves the use of computer programs to create 2 or
3 dimensional graphical representations of physical
objects. It is most used in architectural designs and on
computer animations. It can provide special effects on
movies and advertising.
-CAD is also used in furniture manufacturing and the
software is used to calculate the optimal size or shape of
the product. Engineering department also uses CAD to
analyse the components of various structures.
 BENEFITS OF USING CAD
1. Lower product development costs
2. Increased productivity
3. Improved product quality
4. Good visualisation of the final product and its
constituent parts
5. Errors are minimised i.e it is more accurate
6. faster time-to-market
■ great accuracy, so errors are reduced
7. easy re-use of design data for other product applications.
LIMITATIONS OF CAD
LIMITATIONS OF CAD
1. Complexity of programs
2. Need for extensive employee training
3. It is more expensive i.e computer software used are
very expensive
4 Computer programs can be affected by virus