1 2-508-97 Production and Operations Management Forecasting session II Predicting the future demand...

1 2-508-97 Production and Operations Management

Forecasting session IIForecasting session II

Predicting the future demand

Qualitative forecast methods Subjective

Quantitative forecast methods based on mathematical formulas


Forecasts by Time HorizonForecasts by Time Horizon

Short-range forecast Up to 1 year; usually less than 3 months

Job scheduling, worker assignments

Medium-range forecast 3 months to 3 years

Sales & production planning, budgeting

Long-range forecast 3+ years

New product planning, facility location


Demand BehaviorsDemand Behaviors

Trend a gradual, long-term up or down movement of demand

Seasonal pattern an up-and-down repetitive movement in demand occurring periodically

(short term: often annually)

Cycle an up-and-down repetitive movement in demand (long term)

Special events promotion, stock outs

Random variations movements in demand that do not follow a pattern

Copyright 2006 John Wiley & Sons, Inc.


Trend ComponentTrend Component

Persistent, overall upward or downward pattern

Linear, exponential

Several years duration

Mo., Qtr., Yr.

Response

© 1984-1994 T/Maker Co.

© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458


Seasonal ComponentSeasonal Component

Regular pattern of up & down fluctuations

Due to weather, habits etc.

Occurs within a predefined period: year, month, week, day

Mo., Qtr.

Response

Summer

© 1984-1994 T/Maker Co.



Cyclical ComponentCyclical Component

Repeating up & down movements

Due to interactions of factors influencing economy

Usually 2-10 years duration

Mo., Qtr., Yr.Mo., Qtr., Yr.

ResponseResponseCycle



Forecasting MethodsForecasting Methods

Judgmental (Qualitative) use management judgment, expertise, and opinion to predict future

demand

Time series (Quantitative ) statistical techniques that use historical demand data to predict future

demand

Associative models (Regression methods) attempt to develop a mathematical relationship between demand and

factors that cause its behavior

Copyright 2006 John Wiley & Sons, Inc.


Overview of Qualitative MethodsOverview of Qualitative Methods

Jury of executive opinion Pool opinions of high-level executives, sometimes augment by statistical

models

Delphi method Panel of experts, queried iteratively

Sales force composite Estimates from individual salespersons are reviewed for reasonableness,

then aggregated

Consumer Market Survey Ask the customer



Used when there is shortage of data

Do not require quantitative /mathematical background

Used when shortage of experts

New product forecasting


They are almost always biased

Not consistently accurate over time

Takes years of experience


Jury of Executive OpinionJury of Executive Opinion

Involves small group of high-level managersGroup estimates demand by working together

Combines managerial experience with statistical models

Relatively quick

“Group-think” disadvantage Judgment of experts who have insights………..and also

people from different functional areas.

Person responsible for making forecasts collects opinion from experts

Disadvantage----

strong personalities may dominate



Sales Force CompositeSales Force Composite

Each salesperson projects his or her sales

Combined at district & national levels

Sales reps know customers’ needs

Based on individuals subjective feel

Often a range of forecasted is requested…….optimistic, pessimistic and most likely

Sales people tend to underestimate……particularly when there is quota and commission

SalesSales

© 1995 Corel Corp.



Delphi MethodDelphi Method

Iterative group process

Answer Answer

Qu

esti

on

Qu

esti

on

Feedback

Feedback



Steps of delphi methodSteps of delphi method

Experts judgment….But anonymity among participants

Participating panel members selected

Questionnaire

Results collected, tabulated & summarized

Summary results are reviewed by panel members

Panel members may revise


Consumer Market SurveyConsumer Market Survey

Ask customers about purchasing plans

What consumers say, and what they actually do are often different

Sometimes difficult to answer Assumes that buyers plan their purchases and follow through their plans

more realistic for industrial sales than for sales to households and individuals

Also more appropriate for big items like cars than for convenience goods like toothpaste

How many hours will you use the Internet

next week?

How many hours will you use the Internet

next week?

© 1995 Corel Corp.



Forecasting ApproachesForecasting Approaches

Used when situation is ‘stable’ & historical data exist Existing products Current technology

Involves mathematical techniques

Quantitative Methods Used when situation is vague &

little data exist New products New technology

Involves intuition, experience

Qualitative Methods

Considerations:•Planning horizon

•Availability and value of historical data

•Needs (precision and reliability)

•Time and budget constraints


Realities of ForecastingRealities of Forecasting

1. Forecasts are seldom perfect: almost always wrong by some amount

2. Aggregated forecasts are more accurate than individual forecasts

3. More accurate for shorter time periods

4. Most forecasting methods assume that there is some underlying stability in the system: watch out for special events!

1 2-508-97 Production and Operations Management Forecasting session II Predicting the future demand...

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