1. 1 2-508-97 Production and Operations Management Forecasting session II Predicting the future demand Qualitative forecast methods  Subjective Quantitative forecast methods  based on mathematical formulas

2. 2 2-508-97 Production and Operations Management Forecasts 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

3. 3 2-508-97 Production and Operations Management Demand 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.

4. 4 2-508-97 Production and Operations Management Trend 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

5. 5 2-508-97 Production and Operations Management Seasonal 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. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

6. 6 2-508-97 Production and Operations Management Cyclical Component Repeating up & down movements Due to interactions of factors influencing economy Usually 2-10 years duration Mo., Qtr., Yr. Response Cycle  © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

7. 7 2-508-97 Production and Operations Management Forecasting 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.

8. 8 2-508-97 Production and Operations Management Overview 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 © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

9. 9 2-508-97 Production and Operations Management Used when there is shortage of data Do not require quantitative /mathematical background Used when shortage of experts New product forecasting

10. 10 2-508-97 Production and Operations Management They are almost always biased Not consistently accurate over time Takes years of experience

11. 11 2-508-97 Production and Operations Management Jury of Executive Opinion Involves small group of high-level managers  Group 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 © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

12. 12 2-508-97 Production and Operations Management Sales 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 © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

13. 13 2-508-97 Production and Operations Management Delphi Method Iterative group process Answer Question Feedback © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

14. 14 2-508-97 Production and Operations Management Steps 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

15. 15 2-508-97 Production and Operations Management Consumer 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? © 1995 Corel Corp. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

16. 16 2-508-97 Production and Operations Management Forecasting 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

17. 17 2-508-97 Production and Operations Management Realities 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!