Copperbelt University

School of Business
BS/BF 343: Production and Operations Management
Unit 2

Presenter: Mr. S.Sikombe- BSc.,MA.,MCIPS.,MZIPS

Demand Forecasting
 Overview of forecasting

• Forecasting is the prediction of future events

on the basis of either:
Historical data
Opinions
Trend of events, or
Known future variables
 Introduction forecasting
• Demand estimates for products and services
are the starting point for all the other planning.
• Management develop demand or sales
forecasts based on demand estimates.
• The sales forecasts become inputs to both
business strategy and production resource
forecasts.
Key issues in forecasting

1. A forecast is only as good as the information included in

the forecast (past data)
2. History is not a perfect predictor of the future (i.e.: there is
no such thing as a perfect forecast)

REMEMBER: Forecasting is based on the assumption

that the past predicts the future! When forecasting, think
carefully whether or not the past is strongly related to
what you expect to see in the future…
 Forecasting in Business
• Forecasts provide information that assist managers in
guiding future activities toward organizational goals
• 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
 Human resources forecasts future hiring requirements
 General Characteristics of Forecasts
• Forecasts are seldom perfect
• The prediction does not take account of all
factors; The environment is complex and subject
to rapid change [STEEPLE FACTORS]
• Forecasts are more accurate for groups or
families of items
• Forecasts are more accurate for shorter time
periods; Long term forecasting is problematic
• Every forecast should include an error estimate
Examples of Operations Resource
Forecasts
Forecast Units of
Time Span Item Being Forecast
Horizon Measure

Facility location or expansion
Factory capacities
Years

Kwacha, tons,
Long-Range 
Planning for new products
(1-5) 
Capital expenditures etc.

R&D


Department capacities
Months

Sales planning
Medium- Kwacha, tons,

Procurement planning and
Range (3-11) budgeting etc.

Product groups

Specific product quantities

Machine capacities
Weeks

Planning

Purchasing Physical units of
Short-Range (1 day-3 
Scheduling products
weeks) 
Workforce levels

Production levels

Job assignments
 Elements of a Good Forecast
• The forecast should be timely
• The forecast should be accurate
• The forecast should be reliable
• The forecast should be expressed in
meaningful units
• The forecasting technique should be simple
to understand and use
 Steps in the Forecasting Process
1. Determine the purpose of the forecast (what are the
objectives of forecasting?)
2. Select the Items for which forecasts are needed
(single product or group of products).
3. Determine the Time Horizon for the forecast (short-
term, medium-term or long-term).
4. Select the Forecasting Model (Qualitative technique
or Quantitative technique)
5. Gather information to be used in forecasting.
6. Generate the forecast
7. Monitor forecast accuracy over time
 Historical Demand Data Patterns
1. Trend is the gradual upward or downward
movement of the data overtime. Trends are noted by
an upward or downward sloping line (T).
2. Seasonality is a data pattern that repeats itself over
the period of one year or less (days, weeks, months,
or quarters) (S),
3. Cycle is a data pattern that repeats itself... may take
years (C).
4. Random fluctuations are “blips” in the data caused
by chance or random variation or unexplained
causes (R)
What should we consider when looking at
past demand data?

• Trends

• Seasonality

• Cyclical elements

• Autocorrelation

• Random variation
 Forecasting Methods
• Qualitative Approaches
• Quantitative Approaches
 Qualitative Approaches
 Usually based on judgments about causal factors that
underlie the demand of particular products or
services
 Do not require a demand history for the product or
service, therefore are useful for new
products/services
 Approaches vary in sophistication from scientifically
conducted surveys to intuitive hunches about future
events
 The approach/method that is appropriate depends on
a product’s life cycle stage
 Qualitative Methods

• Educated guess intuitive hunches

• Executive committee consensus
• Delphi method
• Survey of sales force
• Survey of customers
• Historical analogy
• Market research scientific
 Executive committee consensus
• Knowledgeable executives from various departments
within the organization form a Committee to do
forecasts.
• The Committee may use many inputs from all parts of
the organization.
• Such forecasts tend to be compromise forecasts, not
reflecting the extremes that could be present had they
been prepared by individuals.
• This method is the most common forecasting method.
Executive committee consensus
 Delphi Method
This method is used to achieve consensus within a
Committee.
 In this method, executives anonymously answer a
series of questions on successive rounds.
 Each response is fed back to all participants on
each round, and the process is then repeated.
 As many as six rounds may be required before
consensus is reached on the forecast.
This method can result in forecasts that most
participants have ultimately agreed to in spite of
their initial disagreement.
 Survey of Sales Force
Estimates of future regional sales are obtained
from individual members of the sales force.
These estimates are combined to form an estimate
of sales for all regions.
Managers must then transform this estimate into a
sales forecast to ensure realistic estimates.
This is a popular forecasting method for
companies that have a good communication
system in place and that have salespersons who
sell directly to customers.
 Survey of Customers
• Estimates of future sales are obtained directly
from customers.
• Individual customers are surveyed to determine
what quantities of the firm’s products they intend
to purchase in each future time period.
• A sales forecast is determined by combining
individual customer’s responses.
• This method may be preferred by companies that
have relatively few customers.
 Historical Analogy.
• This method ties the estimate of future sales of
a product to knowledge of a similar product’s
sales.
• Knowledge of one product’s sales during
various stages of its product life cycle is
applied to the estimate of sales for a similar
product.
• This method may be particularly useful in
forecasting sales of new products.
 Market Research

• Market Research is the systematic

design, collection, analysis and reporting
of data and findings relevant to a specific
marketing situation facing the
organisation.
• Trying to identify customer habits; new
product ideas, consumer behaviour etc.
Quantitative Forecasting Approaches
• Quantitative forecasting is based on the
assumption that the “forces” that generated
the past demand will generate the future
demand, i.e., history will tend to repeat itself.
• Analysis of the past demand pattern provides
a good basis for forecasting future demand.
• Majority of quantitative approaches fall in
the category of time series analysis.
 Quantitative Approaches

1. Naive approach
2. Moving averages
time-series
3. Exponential models
smoothing
4. Trend projection
5. Linear regression associative
model

4 - 24
 Naïve Approach
• This is the simplest way to forecast.
• Demand for the next period will be equal to the
demand in the most recent period.
• For example, January sales Zamtel Phones is 700
so the sales for February will be 700.
• Does this make sense?
• How about demand for mealie meal?
• For some products this is the most cost-effective
method.
• It provides a starting point for sophisticated models
 Time Series Analysis

• A time series is a set of numbers where the

order or sequence of the numbers is
important, e.g., historical demand.
• Analysis of the time series identifies
patterns;
• Once the patterns are identified, they can be
used to develop a forecast.
 Components of Time Series
• Trends are noted by an upward or downward
sloping line
• Seasonality is a data pattern that repeats
itself over the period of one year or less
• Cycle is a data pattern that repeats itself...
may take years e.g. an economic recession.
• Irregular variations are jumps in the level of
the series due to extraordinary events.
• Random fluctuation from random variation
or unexplained causes.
 Components of Demand
Trend
component
Demand for product or service

Seasonal peaks

Actual demand
line

Average demand
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)

4 - 28
 Seasonal Patterns

Length of Time Number of

Before Pattern Length of Seasons
Is Repeated Season in Pattern
Year Quarter 4
Year Month 12
Year Week 52
Month Day 28-31
Week Day 7
Quantitative Forecasting Approaches

• Linear Regression
• Simple Moving Average
• Weighted Moving Average
• Exponential Smoothing (exponentially
weighted moving average)
 Long-Range Forecasts

• Time spans usually greater than one year.

• Necessary to support strategic decisions
about planning products, processes, and
facilities.
 Simple Linear Regression
• Linear regression analysis establishes a
relationship between a dependent variable
and one or more independent variables.
• In simple linear regression analysis there is
only one independent variable.
• If the data is a time series, the independent
variable is the time period.
• The dependent variable is whatever we wish
to forecast.
Variable Definitions and Formulas for
Simple Linear Regression
 Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique

y^ = a + bx
^ where y = computed value of
the variable to be predicted
(dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
4 - 34
 Values of Dependent Variable Least Squares Method

Actual observation Deviation7

(y-value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
(error) Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 35
Values of Dependent Variable Least Squares Method

Actual observation Deviation7

(y-value)

Deviation5 Deviation6

Deviation3 Least squares method

minimizes the sum of the
squared errors (deviations)
Deviation 4

Deviation1
(error) Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

4 - 36
 Developing a Linear Regression
• Equation
Step 1: Collect the historical data required for
• analysis.
• Step 2: Identify the X and Y values for each
• observation.
• Step 3: Put the data in tabular form and make
• necessary column calculations.
• Step 4: Compute the Y intercept (a) and the
• slope (b) using least squares regression
• equations.
• Step 5: Formulate the estimating equation.
 Example: College Enrollment
Simple Linear Regression
At a small regional college enrollments have
grown steadily over the past six years, as
evidenced below. Use time series regression to
forecast the student enrollments for the next
three years.
Students Students
Year Enrolled (1000s) Year Enrolled
(1000s)
1 2.5 4 3.2
2 2.8 5 3.3
3 2.9 6 3.4
 Example: College Enrollment
• Simple Linear Regression
x y x2 xy
1 2.5 1 2.5
2 2.8 4 5.6
3 2.9 9 8.7
4 3.2 16 12.8
5 3.3 25 16.5
6 3.4 36 20.4
x=21 y=18.1 x2=91 xy=66.5
 Example: College Enrollment

• Y=2.387+0.18X
• Simple Linear Regression
Y7 = 2.387 + 0.180(7) = 3.65 or 3,650 students
Y8 = 2.387 + 0.180(8) = 3.83 or 3,830 students
Y9 = 2.387 + 0.180(9) = 4.01 or 4,010 students

Note: Enrollment is expected to increase by 180

students per year.
 Simple Linear Regression

• Simple linear regression can also be used

when the independent variable X represents
a variable other than time.
• In this case, linear regression is
representative of a class of forecasting
models called causal forecasting models.
 Example: Railroad Products Co.
Simple Linear Regression – Causal Model
The manager of RPC wants to project the
firm’s sales for the next 3 years. He knows that
RPC’s long-range sales are tied very closely to
national freight car loadings. On the next slide
are 7 years of relevant historical data.
Develop a simple linear regression model
between RPC sales and national freight car
loadings. Forecast RPC sales for the next 3 years,
given that the rail industry estimates car loadings
of 250, 270, and 300 million.
Example: Railroad Products Co.
• Simple Linear Regression – Causal Model
RPC Sales Car Loadings
Year(K millions)(K millions)
1 9.5 120
2 11.0 135
3 12.0 130
4 12.5 150
5 14.0 170
6 16.0 190
7 18.0 220
Example: Railroad Products Co.
Simple Linear Regression – Causal Model
x y x2 xy
120 9.5 14,400 1,140
135 11.0 18,225 1,485
130 12.0 16,900 1,560
150 12.5 22,500 1,875
170 14.0 28,900 2,380
190 16.0 36,100 3,040
220 18.0 48,400 3,960
1,115 93.0 185,425 15,440
Example: Railroad Products Co.

Simple Linear Regression – Causal Model

Y8 = 0.528 + 0.0801(250) = K20.55 million
Y9 = 0.528 + 0.0801(270) = K22.16 million
Y10 = 0.528 + 0.0801(300) = K 24.56 million

Note: RPC sales are expected to increase by KR

80,100 for each additional million national freight
car loadings.
 Multiple Regression-Example

Multiple regression analysis is used when there are
two or more independent variables.

An example of a multiple regression equation is:
Y = 50.0 + 0.05X1 + 0.10X2 – 0.03X3
where: Y = firm’s annual sales (K-millions)
X1 = industry sales (K-millions)
X2 = regional per capita income (K-thousands)
X3 = regional per capita debt (K-thousands)
 Coefficient of Correlation (r)
• The coefficient of correlation, r, explains the
relative importance of the relationship
between x and y.
• The sign of r shows the direction of the
relationship.
• The absolute value of r shows the strength of
the relationship.
• The sign of r is always the same as the sign of
b.
• r can take on any value between –1 and +1.
 Coefficient of Correlation (r)
• Meanings of several values of r:
-1 a perfect negative relationship (as x
goes up, y goes down by one unit, and
vice versa)
+1 a perfect positive relationship (as x
goes up, y goes up by one unit, and
vice versa)
0 no relationship exists between x and y
+0.3 a weak positive relationship
-0.8 a strong negative relationship
 Coefficient of Correlation (r)
 r is computed by:

n xy   x  y
r
n  x 2 2

   x  n y    y 
2 2

 Were:
 x= independent variable values
 y = dependent variable values
 n= number of observations
Coefficient of Determination (r ) 2

• Although the coefficient of correlation is

helpful in measuring the relationship between X
and Y;
• terms such as strong, moderate and weak are
not very specific measures of relationship.
• The coefficient of determination, r2, is the
square of the coefficient of correlation.
• The modification of r to r2 allows us to shift
from subjective measures of relationship to a
more specific measure.
Coefficient of Determination (r )
2

r2 
 (Y  y ) 2

 ( y  y ) 2
Example: Railroad Products Co.
Coefficient of Correlation
x y x2 xy y2
120 9.5 14,400 1,140 90.25
135 11.0 18,225 1,485 121.00
130 12.0 16,900 1,560 144.00
150 12.5 22,500 1,875 156.25
170 14.0 28,900 2,380 196.00
190 16.0 36,100 3,040 256.00
220 18.0 48,400 3,960 324.00
1,115 93.0 185,42515,440 1,287.50
Example: Railroad Products Co.

Coefficient of Determination

r2 = (.9829)2 = .966
96.6% of the variation in RPC sales is
explained by national freight car loadings.
 Seasonalised Time Series
Regression Analysis
• Select a representative historical data set.
• Develop a seasonal index for each season.
• Use the seasonal indexes to deseasonalize the data.
• Perform linear regression analysis on the
deseasonalized data.
• Use the regression equation to compute the
forecasts.
• Use the seasonal indexes to reapply the seasonal
patterns to the forecasts.
Example: Computer Products Corp.

• Seasonalised Times Series Regression

Analysis
• An analyst at CPC wants to develop next
year’s quarterly forecasts of sales revenue
for CPC’s line of Epsilon Computers. She
believes that the most recent 8 quarters of
sales (shown on the next slide) are
representative of next year’s sales.
Example: Computer Products Corp.
• Seasonalised Times Series Regression
Analysis
– Representative Historical Data Set

Year Qtr. (K m.) Year Qtr. (K m.)

1 1 7.4 2 1 8.3
1 2 6.5 2 2 7.4
1 3 4.9 2 3 5.4
1 4 16.1 2 4 18.0
 Example: Computer Products Corp.
Seasonalised Times Series Regression Analysis
– Compute the Seasonal Indexes

Quarterly Sales
YearQ1 Q2 Q3 Q4 Total
1 7.4 6.5 4.9 16.1 34.9
2 8.3 7.4 5.4 18.0 39.1
Totals 15.7 13.9 10.3 34.1 74.0
Qtr. Avg. 7.85 6.95 5.15 17.05 9.25
Seas.Ind. .849 .751 .557 1.843 4.000

*Overall quarter average = 74/8 = 9.25

**S.I = Quarter average/Overall quarter average =7.85/9.25=0.849
 Example: Computer Products Corp.
• Seasonalised Times Series Regression
Analysis
– Deseasonalize the Data
Quarterly Sales
Year Q1 Q2 Q3 Q4
1 8.72 8.66 8.80 8.74
2 9.78 9.85 9.69 9.77
 Example: Computer Products Corp.
• Seasonalised Times Series Regression
Analysis
– Perform Regression on Deseasonalised Data
Yr. Qtr. x y x2 xy
1 1 1 8.72 1 8.72
1 2 2 8.66 4 17.32
1 3 3 8.80 9 26.40
1 4 4 8.74 16 34.96
2 1 5 9.78 25 48.90
2 2 6 9.85 36 59.10
2 3 7 9.69 49 67.83
2 4 8 9.77 64 78.16
Totals 36 74.01 204 341.39
Example: Computer Products Corp.
• Seasonalised Times Series Regression Analysis
– Compute the Deseasonalised Forecasts
Y=8.357+0.199X
Y9 = 8.357 + 0.199(9) = 10.148
Y10 = 8.357 + 0.199(10) = 10.347
Y11 = 8.357 + 0.199(11) = 10.546
Y12 = 8.357 + 0.199(12) = 10.745

Note: Average sales are expected to increase by

.199 million (about $200,000) per quarter.
 Example:
Computer Products Corp.
• Seasonalised Times Series Regression Analysis
– Seasonalise the Forecasts
Seas.Deseases.Seas.
Yr.Qtr.IndexForecast Forecasts
3 1 .849 10.148 8.62
3 2 .751 10.347 7.77
3 3 .557 10.546 5.87
3 4 1.843 10.745 19.80
Exercise-Example 2
Short-Range Forecasting Methods

• (Simple) Moving Average

• Weighted Moving Average
• Exponential Smoothing
 Moving Averages

• A MA uses a number of historical actual

data to generate forecasts.
• Key Assumption: Market demands will stay
fairly steady over time.
 Simple Moving Average
• An averaging period (AP) is given or selected
• The forecast for the next period is the arithmetic
average of the AP most recent actual demands
• It is called a “simple” average because each
period used to compute the average is equally
weighted
• . . . more
 Simple Moving Average

• It is called “moving” because as new demand

data becomes available, the oldest data is not
used
• By increasing the AP, the forecast is less
responsive to fluctuations in demand (low
impulse response and high noise dampening)
• By decreasing the AP, the forecast is more
responsive to fluctuations in demand (high
impulse response and low noise dampening)
 Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3
13 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3

© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 67

 Weighted Moving Average
• This is a variation on the simple moving
average where the weights used to compute
the average are not equal.
• This allows more recent demand data to
have a greater effect on the moving
average, therefore the forecast.
• . . . more
 Weighted Moving Average

• The weights must add to 1.0 or 10 or 100%

and generally decrease in value with the age
of the data.
• The distribution of the weights determine the
impulse response of the forecast.
 Weighted Moving Average
 Used when some trend might be
present
 Older data usually less important
 Weights based on experience and
intuition
∑ (weight for period n)
Weighted x (demand in period n)
moving average = ∑ weights

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 Weights Applied Period
Weighted Moving
3 Average
Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13)
13 + (2 x 12)
12 + (10)]/6
10 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2

© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 71

 Potential Problems With
Moving Average
 Increasing n smooths the forecast
but makes it less sensitive to
changes
 Do not forecast trends well
 Require extensive historical data

© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 72

 Moving Average And
Weighted Moving Average
Weighted
moving
30 – average
25 –
Sales demand

20 – Actual
sales
15 –
Moving
10 – average

5 –
| | | | | | | | | | | |
Figure 4.2
J F M A M J J A S O N D
© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 73
 Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant ()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of past
data
© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 74
 Exponential Smoothing
t = Last period’s forecast
+  (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + (At – 1 - Ft – 1)

where Ft = new forecast

Ft – 1 = previous forecast
 = smoothing (or weighting)
constant (0 ≤  ≤ 1)

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 Impact of Different 

225 –

Actual  = .5
demand
200 –
Demand

175 –
 = .1
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter

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 Exponential Smoothing

• The smoothing constant, , must be between

0.0 and 1.0.
• A large  provides a high impulse response
forecast (more sensitive)
• A small  provides a low impulse response
forecast.
 Impact of Different 

225 –
Actual  = .5
 Chose high values
demandof 
when underlying average
Demand

200 –
is likely to change
175
Choose
– low values of 
when underlying average  = .1
is stable
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter

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 Choosing 

The objective is to obtain the most

accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error

Forecast error = Actual demand - Forecast value

= At - Ft
© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 79
Example:
Example: Central
Central Call
Call Center
Center
Moving Average:
CCC wishes to forecast the number of
incoming calls it receives in a day from the
customers of one of its clients, BMI. CCC
schedules the appropriate number of telephone
operators based on projected call volumes.
CCC believes that the most recent 12 days of
call volumes (shown on the next slide) are
representative of the near future call volumes.
 Example:
Example: Central
Central Call
Call Center
Center

• Moving Average
– Representative Historical Data

Day Calls Day Calls

1 159 7 203
2 217 8 195
3 186 9 188
4 161 10 168
5 173 11 198
6 157 12 159
 Example:
Example: Central
Central Call
Call Center
Center

• Moving Average
Use the moving average method with an
AP = 3 days to develop a forecast of the call
volume in Day 13.
F13 = (168 + 198 + 159)/3 = 175.0
calls
 Example:
Example: Central
Central Call
Call Center
Center
Weighted Moving Average
Use the weighted moving average method
with an AP = 3 days and weights of .1 (for
oldest datum), .3, and .6 to develop a forecast
of the call volume in Day 13.
F13 = .1(168) + .3(198) + .6(159) = 171.6
calls
Note: The WMA forecast is lower than the MA
forecast because Day 13’s relatively low call
volume carries almost twice as much weight in
the WMA (.60) as it does in the MA (.33).
 Example:
Example: Central
Central Call
Call Center
Center

Exponential Smoothing
If a smoothing constant value of .25 is used
and the exponential smoothing forecast for Day 11
was 180.76 calls, what is the exponential
smoothing forecast for Day 13?
F12 = 180.76 + .25(198 – 180.76) = 185.07
F13 = 185.07 + .25(159 – 185.07) = 178.55
Evaluating Forecast-Model Performance
• Accuracy
– Accuracy is the typical criterion for judging the
performance of a forecasting approach
– Accuracy is how well the forecasted values match
the actual values
 Monitoring Accuracy

• Accuracy of a forecasting approach needs to

be monitored to assess the confidence you can
have in its forecasts and changes in the market
may require reevaluation of the approach
• Accuracy can be measured in several ways
– Standard error of the forecast (covered earlier)
– Mean absolute deviation (MAD)
– Mean squared error (MSE)
 Common Measures of Error

Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n

Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
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 Example: Central Call Center

• Forecast Accuracy – MAD and MSE

Which forecasting method (the AP = 3
moving average or the  = .25 exponential
smoothing) is preferred, based on the MAD
over the most recent 9 days? (Assume that
the exponential smoothing forecast for Day
3 is the same as the actual call volume.)
 Example:
Example: Central
Central Call
Call Center
Center

• Moving Average
– Representative Historical Data

Day Calls Day Calls

1 159 7 203
2 217 8 195
3 186 9 188
4 161 10 168
5 173 11 198
6 157 12 159
Example: Central Call Center
AP = 3  = .25
Day Calls Forec. |Error| Forec. |Error|

4 161 187.3 26.3 186.0 25.0

5 173 188.0 15.0 179.8 6.8
6 157 173.3 16.3 178.1 21.1
7 203 163.7 39.3 172.8 30.2
8 195 177.7 17.3 180.4 14.6
9 188 185.0 3.0 184.0 4.0
10 168 195.3 27.3 185.0 17.0
11 198 183.7 14.3 180.8 17.2
12 159 184.7 25.7 185.1 26.1

MAD 20.5 18.0

 Forecasting in the Service
Sector
 Presents unusual challenges
 Special need for short term records
 Needs differ greatly as function of
industry and product
 Holidays and other calendar events
 Unusual events

© 2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 91

 Criteria for Selecting
a Forecasting Method
• Cost
• Accuracy
• Data available
• Time span
• Nature of products and services
• Impulse response and noise dampening
 Criteria for Selecting
a Forecasting Method
• Cost and Accuracy
– There is a trade-off between cost and accuracy;
generally, more forecast accuracy can be obtained
at a cost.
– High-accuracy approaches have disadvantages:
• Use more data
• Data are ordinarily more difficult to obtain
• The models are more costly to design, implement, and
operate
• Take longer to use
 Criteria for Selecting
a Forecasting Method
• Cost and Accuracy
– Low/Moderate-Cost Approaches – statistical
models, historical analogies, executive-
committee consensus
– High-Cost Approaches – complex econometric
models, Delphi, and market research
 Criteria for Selecting
a Forecasting Method
• Data Available:
– Is the necessary data available or can it be
economically obtained?
– If the need is to forecast sales of a new product,
then a customer survey may not be practical;
instead, historical analogy or market research
may have to be used.
 Criteria for Selecting
a Forecasting Method
• Time Span
– What operations resource is being forecast and
for what purpose?
– Short-term staffing needs might best be forecast
with moving average or exponential smoothing
models.
– Long-term factory capacity needs might best be
predicted with regression or executive-
committee consensus methods.
 Criteria for Selecting
a Forecasting Method
• Nature of Products and Services
– Is the product/service high cost or high volume?
– Where is the product/service in its life cycle?
– Does the product/service have seasonal demand
fluctuations?
 Criteria for Selecting
a Forecasting Method
• Impulse Response and Noise Dampening:
– An appropriate balance must be achieved
between:
• How responsive we want the forecasting model to be
to changes in the actual demand data
• Our desire to suppress undesirable chance variation
or noise in the demand data
 Reasons for Ineffective Forecasting
• Not involving a broad cross section of people
• Not recognizing that forecasting is integral to
business planning
• Not recognizing that forecasts will always be
wrong
• Not forecasting the right things
• Not selecting an appropriate forecasting method
• Not tracking the accuracy of the forecasting
models
 Forecasting in Small Businesses
and Start-Up Ventures
• Forecasting for these businesses can be
difficult for the following reasons:
– Not enough personnel with the time to forecast
– Personnel lack the necessary skills to develop
good forecasts
– Such businesses are not data-rich environments
– Forecasting for new products/services is always
difficult, even for the experienced forecaster
 Sources of Forecasting Data and
Help
• Government agencies at the local, regional,
state, and federal levels
• Industry associations
• Consulting companies
 Some Specific Forecasting Data
• Consumer Price Index (CPI)
• Gross Domestic Product (GDP)
• Demographic data-age, education, birth rate
• Index of Leading Economic Indicators
• Personal Income and Consumption
• Producer Price Index (PPI)
• Central Statistical Office data
• ZACCI, ZAM, EIZ, ZIPS, ZICA, BOZ data
 Computer Software for Forecasting

• Examples of computer software with forecasting

capabilities
Primarily for
– Forecast Pro
forecasting
– Autobox
– SmartForecasts for Windows
– SAS Have
– SPSS Forecasting
– SAP
modules
– POM Software Library
??? - - 

End of Unit Two