MB0044-Production and Operations Management

Unit-4 Forecasting

Program

: MBA

Semester

: II

Subject Code

: MB0044

Subject Name

: Production and Operations Management

Unit number

:4

Unit Title

: Forecasting

Lecture Number

:4

Lecture Title

: Forecasting

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MB0044-Production and Operations Management

Unit-4 Forecasting

Production and Operations Management

Objectives:
After studying this unit, you should be able to:
Describe forecasting
Explain the strategic importance, cost implementation and
decision making of forecasting
Classify forecasting process
List the methods of forecasting
Explain product life cycle and time series
Describe associative models of forecasting
Explain accuracy of forecasting

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Unit-4 Forecasting

Lecture Outline

Introduction

Strategic Importance of Forecasting

Why Forecasting is Required

Cost Implementations of Forecasting

Decision Making Using Forecasting

Classification of Forecasting Process

Methods of Forecasting

Quantitative Methods

Product Life Cycle

Associative Models of Forecasting

Accuracy of Forecasting

Summary

Check Your Learning

Activity
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Unit-4 Forecasting

Introduction

Forecasting is the art and science of predicting the future events.

Forecasting may involve taking historical data and projecting them

into the future with some sort of mathematical model.

Forecasting is synonymous with estimating and prediction, though

forecasting is considered to be more scientific rather than a crude or
vague guesswork.

In this session, you will learn about the importance of forecasting, the
cost implementations of forecasting, the process for decision making
using forecasting, the classifications and methods of forecasting, the
selection of the forecasting method and the associative models of
forecasting.
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Strategic Importance of Forecasting

Forecasting influences three key activities. They are:

Human
Resources

The number of persons required is a

function of the production output which, in
turn, depends on demand forecasting

Capacity

Capacity refers to the ability to meet the

demand in terms of resources and the
preparedness on the part of the company

Supply Chain
Management

Supply chain management refers to all the

activities that enable the right product at
the right place at the right price

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Why Forecasting is Required

Forecasting is required for:

Production planning
Financial planning
Personnel planning
Scheduling planning
Facilities planning
Process design and planning

Forecasting helps to:

Improve employee relations

Improve materials management
Get better use of capital and facilities
Improve customer service

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Unit-4 Forecasting

Cost Implementations of Forecasting

Forecasting requires special efforts and involves inputs from experts which cost a
lot to the companies. Well-trained experts and associations substantially invest in
human resources and hence charge their clients for the service rendered.

From the above figure, it is understood that to keep the total cost of
forecasting to a minimum, it is necessary that the forecasting effort has to be
raised up to a level at which certain uncertainty is acceptable and hence,
there is preparedness for some possible loss.
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Decision Making using Forecasting

Forecasts are always subject to uncertainty because of the changing
environment and hence, any attempt to improve the forecast accuracy only
increases the cost but not the accuracy. Keeping this in mind, the managerial
decision makers adopt the following rule:
Actual decision = Decision assuming forecasting is correct + Allowance for
forecast error
The error in forecast is calculated by:
Forecast error = Actual demand Forecast
Demand
The figure depicts the process of
forecasting and the associated factors.

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Classification of Forecasting Process

The different forecasting methods based on the context or focus are:

Based on
type of
database

Quantitative

Qualitative

Based on
forecast
time period

Based on
methodology

Short range

Time
methods

Medium
range

Casual
methods

Long range

Predictive
methods

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Methods of Forecasting
Qualitative methods

Quantitative methods

Market surveys

Time series
analysis

Causal
methods

Nominal group
testing

Moving
averages
Exponential
moving
averages
Box
Jenkins
method
Trend
projections
Fourier series

Regression
analysis
Input
output model
Leading
indicators
Simulations
model
Economic
models

Historical
analysis
Jury of executive
opinion
Life cycle
analysis
Delphi method

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Quantitative Methods
Quantitative methods include Time series, Nave method, Moving average
method, and Exponential smoothing method.
A time series is defined as a set of values pertaining to a variable collected
at regular intervals. The figure shown below depicts the components of a
time series.

Components of a Time Series

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Product Life Cycle

The demand for a product keeps changing as it passes through different
stages in its life cycle. The demand starts with zero value and keeps rising
as the product moves along the life cycle and gradually diminishes once the
product is outdated or obsolete. The figure depicts the product life cycle and
volume of demand graphically.

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Selection of Forecasting Method

Because cost, time, and skills are involved, the choice of a forecasting
method is based on several factors. They are:

Form of forecast required

Forecast horizon, period,
and interval

Data availability

Accuracy required

Behaviour of process
being forecasted

Cost of development,
installation, and operation

Case of operation

Management comprehension and

cooperation

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Associative Models of Forecasting

Regression and correlation techniques are means of describing
association between two or more variables. Two types of regressions
simple and multiple regression. Regression is also categorised as linear
nonlinear regression based on the severity of relationship
characteristics. The following table shows the examples.
Simple

Multiple

Linear

Y= a +b x

Y=a+bx1+cx2+dx3

Non-linear

Y= a+bx2

Y=A+BX1+CX22+DX33

the
are
and
and

The forecasting procedures using regression involves the following steps:

1. The variables are plotted along Cartesian or rectangular coordinates
2. A trend equation is developed
3. The equation is used for forecasting
4. The variables are not necessarily related on a time basis

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Accuracy of Forecasting
Several measures of error in forecast have been developed to examine the
issue of error in forecast. Here, we look at two widely used and popular
measure applicable to a wide variety of methods. These two measures are:

Mean Absolute
Deviation
(MAD)
MAD is often used to
measure how closely
forecast values are
matching the actual
data.
MAD = Sum of absolute
deviations for n periods
/ number of periods.

Standard Error
(SE) of
estimate
The standard error of
estimate measures the
variability or scatter of
the observed values
around the regression
line.
The formula for
calculating SE is:

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Summary

Forecasting is the art and science of predicting the future events.

The three activities of forecasting are Human resources, Capacity and

Supply chain management.

Forecasting basically helps to overcome the uncertainty about the

demand and thus provides a workable solution.

Forecasting requires special efforts and involves inputs from experts

which cost a lot to the companies.

Forecasting is broadly classified as quantitative and qualitative.

Qualitative methods include Market survey, Delphi method, Historical

analysis and quantitative methods include Time series analysis and

Causal methods.

The two measures of error in forecast developed to examine the issue of

error in forecast are Mean Absolute Deviation and Standard Error of

Estimate.
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Check Your Learning

1. Name the types of forecasting methods?
Ans: The forecasting methods can be classified into:

Quantitative

Qualitative

2. Why is forecasting required?

Ans: Forecasting is required for:

Production planning

Financial planning

Personnel planning

Scheduling planning

Facilities planning

Process design and planning

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Activity
Assume that you are the sales manager in a company that manufactures
cars. Your company wants to manufacture a SUV for the high-end users
and has asked you to prepare a report to forecast sales of SUVs for this
segment. What are the factors that you will consider to make this report?
Which forecast method will be suitable for this purpose?

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