TRINIDAD MUNICIPAL COLLEGE

Poblacion, Trinidad, Bohol

VISION : A model institution with fully developed technical vocational education and skills
of manpower with positive work attitudes anchored in the core values of Professionalism
and Leadership essential in the creation of self – reliant citizens.

MISSION: To build well – trained professionals, competent and employable that will meet
the demands in the world market.

College of Office Administration

BSOA 2

Subject Code : TQM

Subject : Operation Management
Instructor : Cabulao, Lord Louiel O. LPT
Semester : First Semester

Module 4:

CHAPTER 4

FORECASTING FOR OPERATIONS

Requirements of forecasting for operations

- Planning and control of operations takes place at several levels. Therefore, it is unlikely
that one kind of forecast can serve all needs. We require forecasts of different time
spans to serve as the basis for operating plans developed for different planning
horizons. These includes;
 Plans for current operations and for the immediate future
 Intermediate range plans to provide for the capacities of personnel, materials,
and equipment required for the next 1 to 12 months
 Long range plans for capacity, locations, changing product and service mix, and
the development of new products and services
- When developing plans for current operations and for the immediate future, the degree
of the detail required in forecasting is high. The forecast data should be available in a
form that can be translated into demands for materials, specific labor skills, and time
usage for specific equipment. Therefore, forecast of gross dollar demand, demand by
customer or client classification, or demand of broad product or service classification are
of limited value for short term, daily operations.
- For such short term decisions, we need forecasting methods that are relatively
inexpensive to install and maintain and that can be adapted to situations involving a
large number of items to be forecast.
- For intermediate range plans, such as plans for monthly production or work force levels,
useful forecast will probably be aggregated by product types.
 - Long range plans for capacity, location and new technologies for plant and equipment
require forecast for the next 1 to 10 years. Because of the longer time involved, these
forecast will necessarily have greater uncertainty and lower degree of accuracy.

Basic categories of forecasting methods

Forecasting methods can be divided into three main categories;

 Extrapolative or time series methods

 Causal or exploratory methods
 Qualitative or judgemental methods
- Extrapolative methods use the past history of demand in making a forecast of the future.
The objective of these methods is to identify the pattern in historic data and extrapolate
this pattern for the future.
- Causal methods of forecasting assume that the demand for an item depends on one or
more independent factors.
- Judgemental methods rely on experts’ opinion in making a prediction for the future.
These methods are useful for medium to long range forecasting tasks.

Extrapolative methods

- Extrapolative methods seek to identify pattern in past data. Most these patterns depends
on four components of demand;
 Horizontal
 Trend
 Seasonal
 Cyclical
- The horizontal components of demand exist when the demand fluctuates about an
average demand. The average demand remains constant and does not consistently
increase or decrease.
- The trend component of demand refers to a sustained increase or decrease in demand
from one period to the next.
- The seasonal component of demand pertains to the influence of seasonal factors that
impact demand positively or negatively.
- The cyclical components of demand is similar to the seasonal component except that
seasonality occurs at a regular intervals and is of constant length, whereas the cyclic
components varies in both time and duration of the occurrence.

Moving average method

- The simplest extrapolative method is the moving average method. In this method, two
simple steps are needed to make a forecast for the next period from past data.
 Step 1 – select the number of periods of which moving average will be computed.
This number, N, is called an order of moving average.
 Step 2 – take the average demand for the most recent N periods. This average
demand then becomes the forecast for the next period.
 To illustrate this method, consider the demand data for a product for such, in which
months of February, March, April, May and June, the demand was 90, 80, 120, 100, and
80 units, respectively. Interest is in making a forecast for the month of July.
 Step 1 – choose N= 4. Other value can also be chosen. Large N values will have
a greater smoothing effect on random fluctuations in demand. Smaller N value
will emphasize the more recent demand history. Notice that N= 1 will result in the
present periods demand being the forecast for the next period.
 Step 2 – find the average demand for the most recent 4 periods, N=4.
Demand for March, April, May, June
Moving average = 4
80 † 120 † 100 † 80
= 4
= 95 units
The forecast for July is therefore 95 units.
Now, supposed the actual demand for July turns out to be 100 units. The
forecast for August will be computed by taking the average demand for April,
May, June and July. This forecast will be
120 † 100 † 80 † 100
4 = 100 units
Exponential smoothing method

- In these methods, the weighed assigned to a previous periods demands decreases

exponential as that data gets older. Thus, recent demand data receives a higher weigh
than does older demand data.

Basic exponential smoothing method

- The simplest exponential smoothing method is applicable when where no trend or

seasonality component in the data.
- In the basic exponential smoothing model, the base for the current period,