CBAC101 FORECASTING

CBAC101 FORECASTING

Open Ended

For you, what is forecast? How do we forecast?

Uses of Forecasts

• Plan the system - involves long range of planning about the types of products and services to offer, what facilities and equipment to have, where to locate, etc. 

• Plan the Use of the System - refers to short range of planning.  This involves planning inventory, planning workforce level, purchasing and production, budgeting and scheduling. 

Features Common to all Forecasts

Elements of a Good Forecast

• Timely -  a certain amount of time is needed to respond to the information contained in a forecast.

• Accurate - This will enable users to plan for possible errors and will provide a basis for comparing alternative forecasts.

• Reliable - it should work consistently. 

Elements of a Good Forecast (cont.)

• Meaningful Units - it should be expressed in units such as dollars, units, machines, skills, etc. 

• In writing or written - a written forecast will permit an objective basis for evaluating the forecast once actual results are in.

• Simple to Use and Understand - make sure all of the people involve in the planning and forecasting can easily understand the techniques that will be used.

Steps in the Forecasting Process

1. Determine the purpose of the forecast

What is its purpose and when will it be needed? This will provide an indication of the level of detail required in the forecast, the amount of resources (personnel, computer time, dollars) that can be justified, and the level of accuracy necessary.

2. Establish a time horizon. 

The forecast must indicate a time limit, keeping in mind that accuracy decreases as the time horizon increases. 

3. Select a forecasting technique

4. Gather and analyze relevant data.

Before a forecast can be prepared, data must be gathered and analyzed. Identify any assumptions that are made in conjunction with preparing and using the forecast. 

5. Prepare the forecast. 

Use an appropriate technique.

Open Ended

Why do you think it is important to monitor the forecast?

6. Monitor the forecast

A forecast has to be monitored to determine whether it is performing in a satisfactory manner. If it is not, reexamine the method, assumptions, validity of data, and so on; modify as needed; a prepare a revised forecast.   

Approaches to Forecasting

There are two general approaches to forecasting:

• Qualitative methods - consist mainly of subjective inputs, which often defy precise numerical description. 

• Quantitative methods - involves either the extension of historical data or the development of associative models that attempt to utilize causal (explanatory) variables to make a forecast.

FORECASTS BASED ON JUDGMENT AND OPINION 

Forecasts that use subjective inputs such as opinions from consumer surveys, sales staff, managers, executives, and experts

Delphi method

• Managers and staff complete a series of questionnaires, each developed from the previous one, to achieve a consensus forecast. 

ASSOCIATIVE FORECASTS

technique that uses explanatory variables to predict future demand.

FORECASTS BASED ON TIME SERIES (HISTORICAL) DATA

A time-ordered sequence of observations taken at regular intervals over time.

Open Ended

Do you believe that history repeats itself? If Yes, how will that be possible for business? if No, why not?

Behavior of the series:

• Trend - A long-term upward or downward movement in data. Population shifts, changing incomes, and cultural changes often account for such movements.

• Seasonality - refers to short-term, fairly regular variations generally related to factors such as the calendar or time of day. Restaurants, supermarkets, and theaters experience weekly and even daily "seasonal" variations.

Behavior of the series (cont.):

• Cycles - are wavelike variations of more than one year's duration. These are often related to a variety of economic, political, and even agricultural conditions.

• Irregular variations - are due to unusual circumstances such as severe weather conditions, strikes, or a major change in a product or service. They do not reflect typical behavior, and inclusion in the series can distort the overall picture. Whenever possible, these should be identified and removed from the data.

Behavior of the series (cont.):

• Random variations - are residual variations that remain after all other behaviors have been accounted for

Choosing a Forecasting Technique

The two most important factors are COST and ACCURACY. How much money is budgeted for generating the forecast? What are the possible costs of errors, and what are the benefits that might accrue from an accurate forecast? Generally speaking, the higher the accuracy, the higher the cost, so it is important to weigh cost-accuracy trade-offs carefully. The best forecast is not necessarily the most accurate or the least costly; rather, it is some combination of accuracy and cost deemed best by management.

Thank you!