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Department of Industrial Engineering What is Forecasting

Process of predicting a future event Underlying basis of all

Introduction to Principles of Production business decisions:
Management
WS 2009/2010 • Production
Presented by • Inventory
Dr. Eng. Abed Schokry • Personnel
• Facilities

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Types of Forecasts by Time Horizon
Introduction to Forecasting
Short--range forecast
Short
• What is forecasting?

• Up to 1 year; usually less than 3 months

– Not just a guess • Job scheduling, worker assignments
– Definite methods of predicting future events
Medium--range forecast
Medium
• Why are we interested?
• 3 months to 3 years
– Forecasts provide helpful information to make better • Sales & production planning, budgeting
decisions
– Rewards of good forecasting or penalties for bad forecasting Long--range forecast
Long
can be high
• 3+ years
– Forecasting is easier and cheaper now
• New product planning, facility location

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Short-term vs. Longer-term Forecasting Seven Steps in Forecasting

 Determine the use of the forecast

Medium/long range forecasts deal with more comprehensive issues
and support management decisions regarding planning and  Select the items to be forecasted
products, plants and processes.
 Determine the time horizon of the forecast
Short-term forecasting usually employs different methodologies than
Short-
longer--term forecasting
longer  Select the forecasting model(s)

Short-term forecasts tend to be more accurate than longer-

Short- longer-term  Gather the data
forecasts
 Make the forecast

 Validate and implement results

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Forecasting Approaches Forecasting Process

1. Identify the 2. Collect historical 3. Plot data and

Qualitative Methods
(subjective) = people expertise) (objective) = math models
•Used when situation is
vague & little data exist
•New products
•New technology
• Involves intuition, experience
e.g., forecasting sales on
Internet
purpose of forecast data identify patterns
Quantitative Methods
•Used when situation is ‘stable’ 6. Check forecast 5. Develop/compute 4. Select a forecast
accuracy with one forecast for period model that seems
& historical data exist or more measures of historical data appropriate for data
•Existing products
7.
•Current technology Is accuracy No 8b. Select new
• Involves mathematical of forecast
acceptable?
forecast model or
techniques ¨e.g., forecasting adjust parameters
of existing model
sales of color televisions Yes
9. Adjust forecast
10. Monitor results
8a. Forecast over based on additional
and measure
planning horizon qualitative information
forecast accuracy
and insight

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Overview of Qualitative Methods Overview of Qualitative Methods

 Jury of executive opinion • Jury of executive opinion

 Pool opinions of high-

high-level executives, sometimes augment by Pool opinions of high-level executives, sometimes augment by
statistical models statistical models
 Delphi method • Delphi method
 Panel of experts, queried iteratively
Panel of experts, queried iteratively
 Sales force composite • Sales force composite
 Estimates from individual salespersons are reviewed for
reasonableness, then aggregated Estimates from individual salespersons are
 Consumer Market Survey reviewed for reasonableness, then aggregated
 Ask the customer • Consumer Market Survey
Ask the customer

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Jury of Executive Opinion Sales Force Composite

• Involves small group of high-level managers • Each salesperson projects his or her sales
• Group estimates demand by working together
• Combined at district & national levels
• Combines managerial experience with statistical models
• Sales reps know customers’ wants
• Relatively quick
• Tends to be overly optimistic
• ‘ Group-think’ is disadvantage

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Delphi Method Consumer Market Survey

• Iterative group process

• Ask customers about purchasing plans
• 3 types of people:
• What consumers say, and what they actually do are often different
• Decision makers
• Staff • Sometimes difficult to answer
• Respondents

 A panel of experts are individually questioned about their

perceptions of future events.

• Reduces ‘group-think’

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Quantitative Forecasting Methods (Non-Naive) What is a Time Series?

Is a set of observations measured at successive points in time over

successive periods of time.
A time series is a time-ordered list of historical data.
Assumption: the history is a reasonable predictor of the future.

Obtained by observing response variable at regular time periods

Assumes that factors influencing past and present will continue influence
in future
Example:

Year: 1998 1999 2000 2001 2002

Sales: 78.7 63.5 89.7 93.2 92.1

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Time Series Components Trend Component

•Persistent, overall upward or downward pattern

•Due to population, technology etc.

•Several years duration

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Seasonal Component Common Seasonal Patterns

Examples of seasonal model:

• heating fuel
• skiing equipment
• ice cream

• Regular pattern of up & down fluctuations

• Due to weather, customs etc.
• Occurs within 1 year

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Cyclical Component
• Repeating up & down movements
• Due to interactions of factors influencing economy
• Usually 2-10 years duration
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Costs and Benefits of Forecasting
Benefits:
– Aids decision making
– Informs planning and resource allocation decisions
– If data is of high quality, can be accurate
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Random Component
• Erratic, unsystematic, ‘residual’ fluctuations
• Due to random variation or unforeseen events
o Union strike
o Tornado
• Short duration & non-repeating
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Benefits and Costs of Forecasting
Costs:
– Data not always reliable or accurate
– Data may be out of date
– The past is not always a guide to the future
– Qualitative data may be influenced by peer pressure
– Difficulty of coping with changes to external factors out of the
business’s control – e.g. economic policy, political
developments, natural disasters – Tsunami, earthquakes, etc.
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End of Chapter 3