OPERATIONS

MANAGEMENT
GROUP MEMBERS
1. Mahnoor Qazi
2. Iqra
3. Warda Saleem
4. Sana Zahid
5. Barka Saleem
Chapter
no. 14
 OBJECTIVES
 What is the role of forecasting in an organization? how does it
help the planning process?
 How does the forecasting methodology and context change
with respect to the time horizon?
 What are the steps involved in designing a forecasting system?
 What are the sources of data for forecasting? How do
organization use these data?
 What are well known models used for forecasting? How can
we estimate the model parameters?
 How can we assess the accuracy of forecasts obtained from a
forecasting model?
 What are the managerial considerations in using a forecasting
system?
FORECASTING AS A
PLANNING TOOL:

Forecast are estimates of the

timing and magnitude of the
occurrence of future events.
WHY DO WE FORECAST :

 Dynamic and complex environments

 Short term fluctuations in production
 Better resources management
 Rationalized manpower decisions
 Strategic decisions
FORECASTING TIME HORIZON
Short term forecasting:
 Short term forecasting duration from 1 to 3 months
,nature of decisions is purely tactical.
Medium term forecasting:
 An organization uses forecasting as a starting point to
the annual business planning exercise. Its duration is
of 12 to 18 months.
Long term forecasting:
 Long term forecasting involved strategic decisions for
a period of about 5 to 10 years.
DESIGN OF FORECASTING
SYSTEMS
 Designing and using a forecasting system in
an organization involves three important
stages:
 Identifying an appropriate time zone
 Building and validating a forecasting model
 Using the output from the forecasting
model with managerial judgement.
 Figure 14.1 Designing and using a forecasting system: a three-
stage process
DEVELOPING THE
FORECASTING LOGIC
 The first step in the process is to have clarity on the
purpose behind developing the forecasting system. why
we developing a forecasting model? is the organization
interested in launching new product lines in the near
future? time zone and the type of data.
 Identify the type of data and to select an appropriate
model.
 Develop forecasting logic
 Test the model adequacy using historical data.
 Satisfactory or not?
FIGURE14.2 Steps in developing the forecasting logic
 DEVELOPING THE FORECASTING LOGIC
EXTRAPOLATIVE MODEL:
Extrapolative methods make use of past data to prepare future estimates.
CAUSAL MODELS:
Causal model analyze the data from the view point of a cause-effect
relationship.
Forecasting is often only as good as the quantity and quality of data
available.
 SOURCES OF DATA
 Sales-Force Estimates
The Sales Force Method is a sales forecasting technique that predicts
future sales by analyzing the opinions of sales people as a group.
 Point Of Sales Data Systems
A point of sale (POS) is a place where a customer executes the payment for
goods or services
 Forecasts From Supply Chain Partners
Distributors and retailers are supply chain partners
 Trade/Industry Association Journals
A trade magazine or trade journal is a publication that targets a particular industry,
trade, or business.
 B2B Portals Marketplaces
A B2B marketplace is a multi-vendor B2B e-Commerce portal where multiple
sellers connect to multiple buyers.
 Economic Surveys and Indicators
An economic indicator is a piece of economic data, usually
of macroeconomic scale, that is used by analysts to interpret current or future
 Subjective Knowledge
Knowledge is distinguished from one's knowledge of another
individual's subjective states and from knowledge of objective reality
knowledge is distinguished from one's knowledge of another
individual's subjective states and from knowledge of objective reality
 EXTRAPOLATIVE METHODS
USING TIME SERIES
Extrapolative methods are very useful for short term
forecasts in an organization.

MOVING AVERAGES
A moving average is a technique often used in technical
analysis that price histories by averaging daily prices over
some period of time.
EXTRACTING THE COMPONENTS OF
TIME SERIES:

 There are four components of time series: trend, seasonality,

cyclical and random.
Trend:
 Trend variations that move up and down in a reasonably
predictable pattern.
Seasonality:
 Seasonal variations that repeat over a specific period such as
day, week, month and season etc.
Cyclical:
 Cyclical variations that correspond with business or
economic ‘boom bust’ cycles or follow their own
peculiar cycles.

Random:
 Random variations that do not fall under any of the
above three classifications.
 In a multiplicative model, the extrapolation is done
using a multiplicative relationship among the four
components.
 CAUSAL METHODS OF
FORECASTING:
 Computer packages such as SPSS help
the forecast designer in developing
causal models.
ECONOMETRIC MODELS:

In econometric modeling,

macroeconomic performance is
predicted for a variety of
planning purposes using a large
number of variables.
ACCURACY OF FORECASTS:

 Forecasting models are used only as long as their

predictions are close to reality. If a forecasting
model is found to be erroneous in predicting the
demand for the future, managers lose their faith
in using the system. Moreover incorrect forecast
could create several problems in the organization
as forecasting forms a key input to the planning
function.
USING THE FORECASTING
SYSTEM:
 Fordeveloping an appropriate
forecasting model and establishing
performance measures for obtaining
reliable forecasts, it is important that
managers focus on several issues
pertaining to using the forecasting
system.
Getting started:

 Choosing the right model and estimating

the parameters for forecasting depend on
the cost, data availability and the time
horizon.
Figure 14.7 Managerial issues in using a forecasting system
Focus forecasting:
Simple forecasting models consistently
outperformed complex models especially in
situations, requiring short term forecasting.

Incorporating External Information:

The critical issue in using a forecasting
system is the ability of an organization to
develop methods for incorporating external
information as it becomes available from
time to time.
Stability versus
Responsiveness:
 Users of forecasting systems need to decide whether
managers need a responsive system or a stable system.
 For example, during the periods of significant
happenings in the market like sales promotion schemes
and arrival of new competitor, managers may
temporarily tune the system to be more responsive.
After the effects of the external information diminish ,
the system could be resorted to stability.
Forecast Reliability:

 Finallya good performance measurement system

to identify errors in forecasts is valuable in
helping the organization to periodically assess
the need for either re-estimation the model
parameters or changing the forecasting model
THANK YOU!