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Forecasting

What is forecasting
Forecasting is a tool used for predicting future demand

based on past demand information.


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.

Cont..
Management teams develop sales forecasts based in part

on demand estimates. The sales forecasts become inputs to both business strategy and production resource forecasts. Forecasting is an Integral Part of Business Planning.

Why is forecasting important?


Demand for products and services is usually uncertain. Forecasting can be used for

Strategic planning (long range planning).


Finance and accounting (budgets and cost controls). Marketing (future sales, new products). Production and operations. Short term fluctuations in production.

Batter materials management.


Planning and scheduling. Strategic decisions.

Types of forecasting methods

Qualitative methods Rely on subjective opinions from one or more experts.

Quantitative methods
Rely on data and analytical techniques.

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 products life cycle stage

Qualitative forecasting methods


Market Research: trying to identify customer habits; new product ideas. Delphi Method: openions of the executives are collected in written form and afterwards they are examined carefully and appropriate one is accepted. This method is best suited for long term forecasting.

Qualitative Methods
Type Executive opinion Characteristics Strengths Weaknesses A group of managers Good for strategic or One person's opinion meet & come up with new-product can dominate the a forecast forecasting forecast Uses surveys & Good determinant of It can be difficult to interviews to identify customer preferences develop a good customer preferences questionnaire Seeks to develop a consensus among a group of experts Excellent for Time consuming to forecasting long-term develop product demand, technological changes, and

Market research

Delphi method

Quantitative Forecasting Approaches


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 forecasting methods


Time Series: models that predict future demand based on past history trends

Causal Relationship: models that use statistical techniques to establish relationships between various items and demand Simulation: models that can incorporate some randomness and non-linear effects

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