Chapter 3 Forecasting PDF

3-1 Forecasting Chapter 3 Forecasting Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-2 Fore...

3-1 Forecasting Chapter 3 Forecasting Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-2 Forecasting FORECAST: A statement about the future Used to help managers – Plan the system – Plan the use of the system Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-3 Forecasting Forecast Uses Plan the system – Generally involves long-range plans related to: Types of products and services to offer Facility and equipment levels Facility location Plan the use of the system – Generally involves short- and medium-range plans related to: Inventory management Workforce levels Purchasing Budgeting Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-4 Forecasting Common Features Assumes causal system past ==> future Forecasts rarely perfect because of randomness Forecasts more accurate for groups vs. individuals I see that you will Forecast accuracy decreases get an A this quarter. as time horizon increases Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-5 Forecasting Elements of a Good Forecast Timely e it v ec Reliable Accurate t eff s Co e f ul us i ng Written y to an s M e Ea Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-6 Forecasting Steps in the Forecasting Process “The forecast” Step 6 Monitor the forecast Step 5 Make the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-7 Forecasting Types of Forecasts Judgmental - uses subjective inputs (qualitative) Time series - uses historical data assuming the future will be like the past (quantitative) Associative models - uses explanatory variables to predict the future Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-8 Forecasting Judgmental Forecasts (Qualitative) Consumer surveys Delphi method Executive opinions – Opinions of managers and staff Sales force. Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-9 Forecasting Time Series Forecasts (Quantitative) Trend - long-term movement in data Seasonality - short-term regular variations in data Irregular variations - caused by unusual circumstances Random variations - caused by chance CYCLE- wave like variations lasting more than one year Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-10 Forecasting The Forecast of Forecasts Naïve Simple Moving Average Weighted Moving Average Exponential Smoothing ES with Trend and Seasonality Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-11 Forecasting Naïve Forecast Simple to use Virtually no cost Data analysis is nonexistent Easily understandable Cannot provide high accuracy Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-12 Forecasting Techniques for Averaging Moving average Weighted moving average Exponential smoothing Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-13 Forecasting Points to Know on Moving Averages Pro: Easy to compute and understand Con: All data points were created equal…. …. Weighted Moving Average Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-14 Forecasting Disadvantage of simple linear regression 1-apply only to linear relationship with an independent variable. 2-one needs a considerable amount of data to establish the relationship ( at least 20). 3-all observations are weighted equally Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-15 Forecasting Forecast Accuracy Forecast error – difference between forecast and actual demand – MAD mean absolute deviation – MAPD mean absolute percent deviation – Cumulative error – Average error or bias Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-16 Forecasting Forecast Control Tracking signal – monitors the forecast to see if it is biased high or low (At - Ft) E Tracking signal = = MAD MAD Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-17 Forecasting Sources of forecast errors The model may be inadequate. Irregular variation may be occur. The forecasting technique may be used incorrectly or the results misinterpreted. There are always random variation in the data. Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 3-18 Forecasting End Notes The two most important factors in choosing a forecasting technique: – Cost – Accuracy Keep it SIMPLE! =FORECAST(70,{23,34,12},{67,76,56}) (if you can…let the computer do it) Operations Management, Seventh Edition, by William J. Stevenson McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.