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Forecasting
Importance of Forecasting

PowerPoint presentation to accompany

Heizer, Render, Munson
Operations Management, Twelfth Edition, Global Edition
Principles of Operations Management, Tenth Edition, Global Edition

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Ltd. 4-1

Outline
▶ Global Company Profile:
Walt Disney Parks & Resorts

▶ What Is Forecasting?
▶ The Strategic Importance of
Forecasting
▶ Seven Steps in the Forecasting
System
▶ Forecasting Approaches

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Learning Objectives

When you complete this chapter you

should be able to :
• Understand the importance and application
of Forecasting
• Describe the three time horizons and which
models apply for each
• Understand the importance of forecasting in
each phase of product life cycle

• Explain when to use each of the four

qualitative models
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What is Forecasting?
▶ Process of predicting a
future event
▶ It is art and science of
predicting future events ??
▶ Underlying basis
of all business decisions
▶ Production
▶ Inventory
▶ Personnel
▶ Facilities
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Forecasting Time Horizons

1. Short-range forecast
▶ Generally less than 3 months
▶ Purchasing, job scheduling, workforce levels,
job assignments, production levels
2. Medium-range forecast
▶ 3 months to 3 years
▶ Sales and production planning, budgeting
3. Long-range forecast
▶ 3+ years
▶ New product planning, facility location,
research and development

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Distinguishing Differences

1. Medium/long range forecasts deal with more

comprehensive issues and support management
decisions regarding planning and products,
plants and processes

2. Short-term forecasting usually employs different

methodologies than longer-term forecasting

3. Short-term forecasts tend to be more accurate

than longer-term forecasts

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Influence of Product Life Cycle

Introduction – Growth – Maturity – Decline

▶ Introduction and growth require longer
forecasts than maturity and decline

▶ As product passes through life cycle, forecasts

are useful in projecting
▶ Staffing levels
▶ Inventory levels
▶ Factory capacity

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Product Life Cycle

Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

become critical
critical
Defend market
position
Hybrid engine vehicles Laptop computers

Boeing 787 Xbox One

DVDs
3D printers

Life Cycle Curve

Electric
vehicles
Apple Video
SmartWatch 3-D game physical
players rentals

Figure 2.5
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Product Life Cycle

Introduction Growth Maturity Decline

Product design and Forecasting critical Standardization Little product

development Product and Fewer rapid differentiation
critical process reliability product changes, Cost
Frequent product more minor minimization
and process Competitive changes
Strategy/Issues

product Overcapacity in
OMStrategy/Issues

design changes improvements and Optimum capacity the industry

Short production options Increasing stability Prune line to
runs
Increase capacity of process eliminate items
High production Shift toward not returning
costs product focus good margin
Limited models Reduce
Enhance Long production
Attention to quality distribution capacity
runs
OM

Product
improvement and
cost cutting

Figure 2.5
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Types of Forecasts
1. Economic forecasts
▶ Address business cycle – inflation rate, money supply, housing
starts, etc.
Example: Global economic situation and Oil Prices’ impact on
consumer products in middle east.
2. Technological forecasts
▶ Predict rate of technological progress
▶ Impacts development of new products
Ex: Labor intensive to technology intensive (Car wash); Market
place to Market space, Smart phones and Uber
Question: What do you think about the future of Superstores
3. Demand forecasts
▶ Predict sales of existing products and services

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Strategic Importance of Forecasting

▶ Supply-Chain Management – Good supplier

relations, advantages in product innovation, cost
and speed to market

▶ Human Resources – Hiring, training, laying off

workers

▶ Capacity – Capacity shortages can result in

undependable delivery, loss of customers, loss of
market share

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Seven Steps in Forecasting

1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the
forecast
6. Make the forecast
7. Validate and implement the results

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The Realities!

▶ Forecasts are seldom perfect,

unpredictable outside factors may impact
the forecast
▶ Most techniques assume an underlying
stability in the system
▶ Product family and aggregated forecasts
are more accurate than individual product
forecasts

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Forecasting Approaches

Qualitative Methods

▶ Used when situation is vague and

little data exist
▶ New products
▶ New technology
▶ Involves intuition, experience
▶ e.g., forecasting sales on Internet

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Forecasting Approaches

Quantitative Methods

▶ Used when situation is ‘stable’ and

historical data exist
▶ Existing products
▶ Current technology
▶ Involves mathematical techniques
▶ e.g., forecasting sales of color
televisions
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Overview of Qualitative Methods

1. Jury of executive opinion

▶ Pool opinions of high-level experts,
sometimes augmented by statistical models

2. Delphi method
▶ Panel of experts, queried iteratively
▶ 3 Level
• Respondents
• Data collector and analysis
• Decision Makers -4-5 senior executive

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Overview of Qualitative Methods

3. Sales force composite
▶ Estimates from individual salespersons are reviewed for
reasonableness, then aggregated
4. Market Survey
▶ Ask the customer

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Jury of Executive Opinion

▶ Involves small group of high-level experts

and managers
▶ Group estimates demand by working
together
▶ Combines managerial experience with
statistical models
▶ Relatively quick
▶ ‘Group-think’
disadvantage

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Delphi Method
▶ Iterative group process,
continues until consensus is
reached Decision Makers
(Evaluate responses
▶ Three types of participants and make decisions)
▶ Decision makers
▶ Staff
Staff
▶ Respondents (Administering
survey)

Respondents
(People who can make
valuable judgments)
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Sales Force Composite

▶ Each salesperson projects his or her

sales
▶ Combined at district and national
levels
▶ Sales reps know customers’ wants
▶ May be overly optimistic

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Market Survey

▶ Ask customers about purchasing

plans
▶ Useful for demand and product
design and planning
▶ What consumers say and what they
actually do may be different
▶ May be overly optimistic

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