The document discusses forecasting and different forecasting methods. It describes short, medium, and long range forecasts and their uses. It also explains qualitative and quantitative forecasting approaches, including time series models, econometric models, judgmental forecasting models, and the Delphi method.
The document discusses forecasting and different forecasting methods. It describes short, medium, and long range forecasts and their uses. It also explains qualitative and quantitative forecasting approaches, including time series models, econometric models, judgmental forecasting models, and the Delphi method.
The document discusses forecasting and different forecasting methods. It describes short, medium, and long range forecasts and their uses. It also explains qualitative and quantitative forecasting approaches, including time series models, econometric models, judgmental forecasting models, and the Delphi method.
The document discusses forecasting and different forecasting methods. It describes short, medium, and long range forecasts and their uses. It also explains qualitative and quantitative forecasting approaches, including time series models, econometric models, judgmental forecasting models, and the Delphi method.
ACCURACY Forecasting is the art and science of predicting what will happen in the future. Sometimes that is determined by a mathematical method; sometimes it is based on the intuition of the operations manager. Most forecasts and end decisions are a combination of both. Forecasting is conducted by what are referred to as time horizons.
1. Short range forecast. While it can be up to one year,
this forecast is usually used for three months or less. It is used for planning purchases, hiring, job assignments, production levels, and the like. 2. Medium range forecast. This is generally three months to three years. Medium range forecasts are used for sales and production planning, budgeting, and analysis of different operating plans. 3. Long range forecast. Generally three years or more in time span, it is used for new products, capital expenditures, facility expansion, relocation, and research and development. Medium and long range forecasts differ from short range forecasts by other characteristics as well.
1. Medium and long range forecasts are more comprehensive
in nature. They support and guide management decisions in planning products, processes, and plants. A new plant can take seven or eight years from the time it is thought of, until it is ready to move into and become functional. 2. Short term forecasts use different methodologies than the others. Most short term forecasts are quantitative in nature and use existing data in mathematical formulas to anticipate immediate future needs and impacts. 3. Short term forecasts are more accurate than medium or long range forecasts. A lot can change in three months, a year, three years, and longer. Factors that could influence those forecasts change every day. Short term forecasts need to be updated regularly to maintain their effectiveness. Types of Forecasts There are three major types of forecasting, regardless of time horizon, that are used by organizations.
1. Economic forecasts address the business cycle. They predict housing
starts, inflation rates, money supplies, and other indicators. 2. Technological forecasts monitor rates of technological progress. This keeps organizations abreast of trends and can result in exciting new products. New products may require new facilities and equipment, which must be planned for in the appropriate time frame. 3. Demand forecasts deal with the company's products and estimate consumer demand. These are also referred to as sales forecasts, which have multiple purposes. In addition to driving scheduling, production, and capacity, they are also inputs to financial, personnel, and marketing future plans Strategic Importance of Forecasts
Operations managers have two tools at their disposal by which
to make decisions: actual data and forecasts. The importance of forecasting cannot be underestimated. Take a product forecast and the functions of human resources, capacity, and supply chain management.
The workforce is based on demand. This includes hiring,
training, and lay-off of workers. If a large demand is suddenly thrust upon the organization, training declines and the quality of the product could suffer. When the capacity cannot keep up to the demand, the result is undependable delivery, loss of customers, and maybe loss of market share. Yet, excess capacity can skyrocket costs.
Last minute shipping means high cost. Asking for parts last minute can raise the cost. Most profit margins are slim, which means either of those scenarios can wipe out a profit margin and have an organization operating at cost -- or at a loss.
These scenarios are why forecasting is important to an
organization. Good operations managers learn how to forecast, to trust the numbers, and to trust their instincts to make the right decisions for their firm. Forecasting System
These seven steps can generate forecasts
1. Determine what the forecast is for.
2. Select the items for the forecast. 3. Select the time horizon. 4. Select the forecast model type. 5. Gather data to be input into the model. 6. Make the forecast. 7. Verify and implement the results.
Routinely repeat these steps, regardless of the time horizon,
to stay abreast of changes in regard to internal and external factors. Forecasting Approaches
There are two predominant approaches to
qualitative approach and forecasting: quantitative analysis. A qualitative approach uses factors such as experience, instinct and emotion while the quantitative analysis relies heavily on mathematics, historical data and casual variables. Qualitative methods include:
1. Jury of executive opinion. This is based on the inputs and decisions
of high-level experts or management. 2. Delphi method. Decision makers, staff, and respondents all meet to develop the forecast. Every shareholder in the process provides input. 3. Sales force composite. Each sales person provides an individual estimate which is reviewed for realism by management, and then combined for a big picture view. 4. Consumer market survey. This is surveying the prospective customer base to determine demand for existing products and can also be used for new products. As these methods are based mostly on instinct, experience and human input, be cautious of excessive optimism. Quantitative methods are in two categories. Time-series models predict by assuming the future is a function of the past. Associative models uses similar historical data inputs and then includes other external variables such as advertising budget, housing, competitor's prices and more. Four common types of forecasting models While there are numerous ways to forecast business outcomes, there are four main types of models or methods that companies use to predict actions in the future:
•Time series model
•Econometric model •Judgmental forecasting model •The Delphi method Time series model This type of model uses historical data as the key to reliable forecasting. You'll be able to visualize patterns of data better when you know how the variables interact in terms of hours, weeks, months or years.
Econometric model Those employed in the field of economics often use an econometric model to forecast changes in supply and demand, as well as prices. These models incorporate complex data and knowledge throughout the process of creation. Like the name infers, this type of statistical model proves valuable when predicting future developments in the economy.
Judgmental forecasting model
Various forecasting models of the judgmental kind utilize subjective and intuitive information to make predictions. For instance, there are times when there is no data available for reference. Launching a new product or facing unpredictable market conditions also creates situations in which judgmental forecasting models prove beneficial. The Delphi method This method is commonly used to forecast trends based on information given by a panel of experts. This series of steps is based on the Delphi method, which is in reference to the Oracle of Delphi. It assumes that a group's answers are more useful and unbiased than answers provided by one individual.
The total number of rounds involved may differ depending on the goal of the company or group's researchers. These experts answer a series of questions in continuous rounds that ultimately lead to the "correct answer" a company is looking for. The quality of information improves with each round as the experts revise their previous assumptions following additional insight from other members in the panel. The method ends upon completion of a predetermined metric. To be continued… references
