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Forecasting
Why Forecasting?
Decision making is often complicated due to uncertainty Since Each decision involves considerable cash flow, time & other resource, good estimate is a crucial requirement Forecast are estimate of timing & magnitude of the occurrence of future events. Primary Function is to Predict the Future using (time series related or other) data we have in hand Forecasting involves a study of the present & past data with a view to estimate the future.
The better the Management is able to forecast the future the better will it be prepared to face the future.
Forecast dynamic & complex environment Forecast short term fluctuations in production forecast availability/need for manpower Better materials management Basis for planning & scheduling Strategic decision.
Nature of decision will be tactical as well as strategic E.g. annual production planning, capacity augmentation, Long-range forecast Long Involves purely strategic decision for time period of about 5 to 10 years It involves subjective knowledge from the experts Level of uncertainty is high E.g. New product planning, facility location
Sources of data
Good forecasting depends on quantity & quality of data that is available. Some of the imp sources of data are
Sales force estimate Point of sales (pos)data systems Forecasts from supply chain partners Trade / industry association journals B2B portals / market places Economic surveys & indicators Subjective knowledge
Qualitative Methods
Quantitative Methods
Subjective approach Used when situation is vague & little data exist New products New technology Involves intuition, experience
Objective in nature Used when situation is stable & historical data exist Existing products Current technology Involves mathematical techniques
Involves small group of high-level managers highCombines managerial experience with statistical models Relatively quick GroupGroup-think disadvantage
Each salesperson projects his or her sales Combined at district & national levels Sales reps know customers wants Tends to be overly optimistic
Sales
Delphi Method
The Delphi Method seeks to achieve a consensus among group members through a series of questionnaires. The questionnaires are answered anonymously and individually by each member of the group. The answers are summarized and sent back to the group members along with the next questionnaire. This process is repeated until a group consensus is reached. This usually only takes two iterations, but can sometimes take as many as six rounds before a consensus is reached.
Quantitative Methods
Extrapolative methods Make use of past data & prepare future estimates by extrapolating. Considers only one factor at a time E.g. moving avg method, weighted moving average, exponential method Causal models Analyze data from the point view of cause & effect relationship. Considers more than one factor & their relationship. E.g. Linear regression, econometric models.
Moving Average
Naive forecast demand in the current period is used as next periods forecast Simple moving average The forecast is computed by taking average of the actual sales in the preceding months Can be used when demand is stable and with no pronounced behavioral patterns Weighted moving average weights are assigned to most recent data Adjusts moving average method to more closely reflect data fluctuations
71 Di i=
MAn =
where n = number of periods in the moving average Di = demand in period i
WMAn =
where
7 Wi Di
i=1
Exponential Smoothing
Averaging method Weights most recent data more strongly Reacts more to recent changes Widely used, accurate method
Demand
Ft 1 ! E ( Dt ) (1 E )( Ft Tt )
Tt +1 = (Ft+1 Ft ) + (1 - ) Tt = trend factor for the next period Tt = trend factor for the current period = smoothing constant for the trend adjustment factor
Linear trend line y = 35.2 + 1.72x Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70 60 50 Demand 40 Linear trend line 30 20 10 0 | 1 | 2 | 3 | 4 | 5 | | 6 7 Period | 8 | 9 | 10 | 11 | 12 | 13
Actual
Seasonal Adjustments
It adjust the forecast by scaling up the estimate during periods of high demand & scaling down during periods of low demand Seasonality index is estimated by taking a ratio of actual period demand with the average demand for the period Di Seasonal factor = Si = D
Difference between demand & forecast for the period. Positive value indicates underestimation of demand & vice versa. Forecast error t = Dt Ft SFE (Sum of forecast error) MAD (mean absolute deviation) Tracking Signal
SFE ! ei
i !1