OM-Chapter 5 Flashcards
Forecasting
Forecasting
Preface to planning, an attempt to predict future value of a changing variable, subjective methods are methods whose outcome is mostly influenced by the person doing the forecast. Objective methods are methods whose outcome is mostly influenced by the available data
Forecast addresses
Macro-circumstances
Competitiveness
Market tendencies
Sourcing funds required
Two primary uses
-Plan the system as a whole. Long-range planning is normally used in strategic planning etc. new products/services-term —Short-term forecasts pertaining to ongoing operations, includes the planning of inventory levels and purchasing activities
Additional uses
-Business forecasting(predict demand)
-Forecasting is never an exact science
-Context determines choice of method
Features common to all forecasts
-Assumption that past trends will be present in future: It is assumed that the factors responsible for influencing demand in the past will not change
-No precise prediction can be made :What happens in the actual situation usually differs from what was initially forecast
-Groups more accurate :Errors are cancelled out between the different items in the group
-Longer time horizon is less reliable
Time horizons
Short-range(fewweeks-12 months)better reliability
Medium-range(12 months-5 years)
Long-range(5yrs+)
Requirements of an accurate forecast
-Use simple technique and easy to understand
-Accuracy
-Cost effectiveness
-Meaningful units
-Timely
-Reliable
-Should be in writing
Importance of forecasting
-Decision making
-Resource allocation
-Risk management
-Setting goals and targets
-Budgeting and financial planning
-Supply chain management
Important situational factors to be considered
-Accuracy and cost
-Availability of data
-Time span of forecast
-Nature of the goods and services
-Changes in the market
-Use/decision factors
Reasons for ineffective forecasts
-Failure to select applicable method
-Inability to recognize that forecasting must form an integral part of the business
-Neglecting to monitor the accuracy of the forecast
-Failure to involve all of the relevant people
-Inability to realise that the forecast will be wrong
-Forecasting of incorrect items is not helpful
Categories of forecasting techniques
Associative methods
Judgmental forecasts
Time series forecasts
Approaches to forecasting
-Quantitative :Calculations and statistical historical data are used to project unto the future
-Qualitative: Based on judgement of parties involved in the forecast
-Casual: Try and explain reasons for changes in patterns
Associative methods
These methods use equations that are descriptive of the variables that will be used(mathematical)
Judgmental forecasts
These types of forecast rely solely on the subjective judgment of an individual .Obtained from managers, executives
Time series forecasts
Time series analysis is a quantitative technique whereby data are manipulated using mathematical methods
Quantitative approach techniques
-Time series data: Historical or past data that have been collected over a period of time ,representing a certain activity
-Trends: Upward/downward movement that takes place over a long period of time
-Seasonality: Variations are mostly regular and can be related to events on a calendar or the movement of the seasons
-Cycles: Patterns that vary ;their duration is usually more than one year
-Irregular variations: Event out of the ordinary occurs
-Random variations: Variable that remains after all the other behavioral patterns have been accounted for
Qualitative approach
-Relied upon when hard data not available
-Used when forecast required in a hurry
Qualitative approach techniques
-Consumer survey :market research method/customer survey method
-Jury of executive opinion: Top-level management meets and as a group develop a forecast of future demand
-Sales-force opinion: Grassroots method: People closest to the subject being forecast are used in compiling the forecast
-The Delphi method: A group formed consisting of respondents from outside the company, staff members from the company and the decision makers
-Educated guess: Personal insight method, when an individual is familiar with a certain situation they use their best judgement based on this knowledge to prepare a forecast
-Historical analogy: The historical data about the similar product will be analysed and then used in the forecast for the new product
