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Module 008

The document discusses forecasting techniques and processes. It describes common features of forecasts, elements of a good forecast, steps in the forecasting process including determining purpose, selecting techniques, and monitoring forecasts. It also covers qualitative and quantitative approaches, naive methods, averaging methods, exponential smoothing, and examples of computations.

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Mico Villegas Balbuena
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22 views10 pages

Module 008

The document discusses forecasting techniques and processes. It describes common features of forecasts, elements of a good forecast, steps in the forecasting process including determining purpose, selecting techniques, and monitoring forecasts. It also covers qualitative and quantitative approaches, naive methods, averaging methods, exponential smoothing, and examples of computations.

Uploaded by

Mico Villegas Balbuena
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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DEMAND

MANAGEMENT
AND
FORECASTING
MODULE 8
Prepared by :
Mico V. Balbuena
1
Forecast – a statement about the future
value of a variable of interest
FEATURES COMMON TO ALL FORECAST

Forecasting techniques generally assume that the


same underlying causal system that existed in the
past will continue to exist in the future.
Forecasts are not perfect; actual results usually
differ from predicted values; the presence of
randomness precludes a perfect forecast.
Allowances should be made for forecast errors.
Forecasts for groups of items tend to be more
accurate than forecasts for individual
items because forecasting errors among items in
a group usually have a cancelling effect.
Opportunities for grouping may arise if parts or
raw materials are used for multiple products or if
a product or service is demanded by a number of
independent sources.
Forecast accuracy decreases as the time period
covered by the forecast—the time horizon —
increases. Generally speaking, short-range
forecasts must contend with fewer uncertainties
than longer-range forecasts, so they tend to be
more accurate.
ELEMENTS OF A GOOD FORECAST
Timely
Accurate
Reliable and consistently
Expressed in meaningful units.
Should be in writing.
Simple to understand and use.
Cost effective.

The forecast should be timely.


Usually, a certain amount of time is needed to respond
to the information contained in a forecast.
For example, capacity cannot be expanded overnight,
nor can inventory levels be changed immediately.
Donna
Hence, the forecasting horizon must cover the time
necessary to implement possible changes.
Stroupe
The forecast should be accurate.
The degree of accuracy should be stated. This will
enable users to plan for possible errors and will
provide a basis for comparing alternative forecasts.

2
3

Topic 1 Topic 2
The forecast should be The forecast should be
reliable; it should work expressed in
consistently. meaningful units.

A technique that Financial planners need


sometimes provides a to know how many peso
good forecast and will be needed,
sometimes a poor one production planners
will leave users with the need to know how many
units will be needed, and
uneasy feeling that they
schedulers need to know
may get burned every
what machines and skills
time a new forecast is
will be required.
issued.
The forecast should be in writing.
Although this will not guarantee that all concerned are using
the same information, it will at least increase the likelihood of
it.
In addition, a written forecast will permit an objective basis
for evaluating the forecast once actual results are in.

The forecasting technique should be simple to


understand and use.

Users often lack confidence in forecasts based on


sophisticated techniques; they do not understand either the
circumstances in which the techniques are appropriate or
the limitations of the techniques.
Misuse of techniques is an obvious consequence. Not
surprisingly, fairly simple forecasting techniques enjoy
widespread popularity because users are more comfortable
working with them. Reese Miller

The forecast should be cost-effective. The benefits should


outweigh the costs.

Olivia Wilson Daniel Gallego

4
5

STEPS IN THE FORECASTING


PROCESS
1. Determine the purpose of the forecast
2. Establish a time horizon
3. Select a forecasting technique
4. Obtain, clean and analyze appropriate data
5. Make the forecast
6. Monitor the forecast

Determine the purpose of the forecast.

How will it be used and when will it be


needed?

This step will provide an indication of the level of detail


required in the forecast, the amount of resources
(personnel, computer time, dollars) that can be justified,
and the level of accuracy necessary.

Select a forecasting technique.


Establish a time horizon.
The forecast must indicate a time interval, keeping in
mind that accuracy decreases as the time horizon
increases.

Obtain, clean, and analyze appropriate data.


Obtaining the data can involve significant effort. Once
obtained, the data may need to be “cleaned” to get rid
of outliers and obviously incorrect data before analysis.
Monitor the forecast errors
The forecast errors should be monitored to
determine if the forecast is performing in a
satisfactory manner.
If it is not, re-examine the method, assumptions,
validity of data, and so on; modify as needed; and
prepare a revised forecast.

Select a forecasting technique.


Make the forecast

APPROACHES TO FORECASTING
1. Qualitative methods
2. Quantitative methods

CLASSIFICATION OF FORECAST
Judgemental Forecasts – rely on analysis of
subjective inputs obtained from various
sources.
a. Executive opinions
b. Sales force opinions
c. consumer surveys
d. Delphi method

6
Time series forecasts – attempt to project
past experience into the future.
a. Trend
b. Seasonality
c. cycles
d. Irregular

NAIVE METHODS
naive forecast – a forecast for any period that
equals the previous period’s actual value.

Ex. If demand for a product last week was 20


cases, the forecast for this week is 20 cases.

Approaches for Averaging – smooth


fluctuations in a time series.

7
Compute a three-period moving average forecast given
demand for shopping carts for the last five periods.

Period demand
1 42
2 40
3 43
4 40
5 41
If actual demand in period 6 turns out to be 38, What is the
forecast for period 7. compute a three-period moving
average.
Weighted Moving Average – more recent values in a
series are given more weight in computing forecast.

Given the following demand data


1. Compute a weighted average forecast using a
weight of .40 for the most recent period .30 for the
next most recent .20 for the next .10 for the next.
2. If the actual demand for period 6 is 39, forecast
demand for period 7 using the same weights as in
part a.

Period Demand
1 42
2 40
3 43
4 40
5 41

8
Exponential Smoothing – a weighted averaging
method based on previous forecast plus a
percentage of the forecast error.

Suppose the previous forecast was 42 units, actual


demand was 40 units, and α = .10

_________________________

then, if the actual demand turns out to be 43, the


next forecast
Ft = 41.8 + .10 (43 – 41-8) = 41.92

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