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OM Module 2

The document discusses various methods for forecasting including qualitative judgmental methods, quantitative time series models, and causal models. It describes different types of time series models like naive, simple moving average, weighted moving average, and exponential smoothing. It also covers causal models and tools like linear regression. The document provides details on various forecasting techniques and key aspects of building forecasts.

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m a sanjan setty
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0% found this document useful (0 votes)
34 views34 pages

OM Module 2

The document discusses various methods for forecasting including qualitative judgmental methods, quantitative time series models, and causal models. It describes different types of time series models like naive, simple moving average, weighted moving average, and exponential smoothing. It also covers causal models and tools like linear regression. The document provides details on various forecasting techniques and key aspects of building forecasts.

Uploaded by

m a sanjan setty
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FORECASTING

Forecasting
• Forecasting are estimated occurrence, timing or
magnitude of future events . Forecasting is a
subjective estimates of the future.
• Forecasts affect decisions and activities throughout an
organization
– Accounting, finance department
– Human resources department
– Marketing department
– MIS department
– Operations department
– Product / service design department
Forecasting in operations
• Manager should know the customer demand
of product and services to plan long and short
range estimates of each product/services and
overall demand to plan operations activities.
• Detail forecasting for individual items are used
for planning.
• Product demand forecasts are used to plan for
capacity, location and layout over a much
longer time span.
Forecasting as a planning tool
• In majority of the situations certainty of
happening a event is not there
• Assumptions are carried out during such
situations
• E.g.: adding a new product line in a
manufacturing unit
• Forecasting addresses these issues and provide
the manager with a set of tools and techniques
for the estimation process
• Forecast are the estimates of timing and
magnitude of the occurrence of future events
4
Key functions of forecasting
• A tool for predicting events related to operations
planning and control
• An estimation tool
• A way of addressing the complex and uncertain
environment surrounding business decision
making
• A vital perspective for the planning process in
organizations

5
Need of forecasting
• Majority of activities depends on future sales.
• Demand forecasting-decision on 3 M’s –men, material,
machinery.
• It is always necessary in the changing necessary and
uncertain technical, economical and market scenario.
• It throws light on the future trend of the market
• Needed for material planning in order to make
material available in right quantities and at the right
time for production.
• It is needed for schedule production activities in order
to ensure maximum utilization of plants capacity
Sources of data
• Source can be direct (primary)or indirect (secondary).
• Published documents by government and professional
bodies
• News papers, books and magazines
• Historical data
• Expert opinion
• Delphi technique
• Surveys or opinion polls
• Market research
• Trial marketing, Point of sales data systems
• Forecast from supply chain partners
Forecasting time horizon
• Time horizon:
• Short term forecasting
• Long term forecasting
• Medium term forecasting
Forecasting Across the Organization
• Forecasting is critical to management of all
organizational functional areas
– Marketing relies on forecasting to predict demand and
future sales
– Finance forecasts stock prices, financial performance,
capital investment needs..
– Information systems provides ability to share databases
and information
– Human resources forecasts future hiring requirements
TYPES OF FORECASTING MODELS
• Qualitative methods – Judgmental methods
Forecasts generated subjectively by the forecaster
Educated guesses
Non quantitative forecasting technique based upon expert
opinions and intuition . Typically uses when there are no
data available.
• Quantitative methods:
Forecasts generated through mathematical modeling
Qualitative Methods
Quantitative Methods
• Time Series Models:
– Assumes information needed to generate a forecast is
contained in a time series of data
– Assumes the future will follow same patterns as the past

• Causal Models or Associative Models


– Explores cause-and-effect relationships
– Uses leading indicators to predict the future
– Trend projection and liner regression analysis.
Time series analysis
• Forecasting models try to predict the future based on past data.
• Forecaster looks for data patterns as
Data = Historic pattern + Random variation
• Historic pattern to be forecasted:
– Level (long-term average) – data fluctuates around a constant mean
– Trend – data exhibits an increasing or decreasing pattern
– Seasonality – any pattern that regularly repeats itself and is of a constant
length
– Cycle – patterns created by economic fluctuations
• Random Variation cannot be predicted
Time Series Models
• Naive:
– The forecast is equal to the actual value observed during the
last period – good for level patterns
• Simple Mean:
– The average of all available data - good for level patterns
• Moving Average:
– 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

© Wiley 2007
Moving Average
Time Series Models (continued)

• Weighted Moving Average:

• All weights must add to 100% or 1.00


e.g. Wt .5, Wt-1 .3, Wt-2 .2 (weights add to 1.0)

• Allows emphasizing one period over others; above


indicates more weight on recent data (Wt=.5)

• Differs from the simple moving average that weighs all


periods equally - more responsive to trends
Weighted Moving Average
Time Series Models (continued)
• Exponential Smoothing:
Most frequently used time series method because of ease
of use and minimal amount of data needed
• Need just three pieces of data to start:
– (Ft)=the exponentially smoothened forecast for period t
– (Dt)=Actual Demand for period t
– Select value of smoothing coefficient between 0 and 1.0
• If no last period forecast is available, average the last
few periods or use naive method
• Higher values (e.g. .7 or .8) may place too much
weight on last period’s random variation
• lower value of indicates that the forecast is not
responsive to the demand
Causal Models

• Often, leading indicators can help to predict changes in


future demand
• Causal models establish a cause-and-effect relationship
between independent and dependent variables
• A common tool of causal modeling is linear regression:
• Additional related variables may require multiple
regression modeling
Linear Regression

• Identify dependent (y) and


independent (x) variables
• Solve for the slope of the line

• Solve for the y intercept

• Develop your equation for the


trend line
Y=a + bX
Forecast error
Measures of forecast error
MAD
MAD
MSE
MSE
MAPE
MAPE
Summary

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