Republic of the Philippines

Eastern Visayas States University

Tacloban City

Learning
Modules
In
Operations
Management
(FORECASTING)

PREPARED BY:

Cabanatan, Dianne

Luciano, Carien

Simborio, Shane Mae

Velarde, Rhaya Blessie A.

BSOA- 2A

SUBMITTED TO:

Melody Gariando
 Republic of the Philippines
Eastern Visayas States University
Tacloban City

INTRODUCTION

❖ Forecasts help anticipate change within the market. by having insights into not
only current data but projections of what could happen in the future, business
can make better adjustments. forecasts help business optimize their
strategies and alter their current operations to change potential outcomes. In
this chapter, you will learn more about forecasting, the different types of
forecasting methods available, and how to select and use the proper
techniques. You will also learn about the latest available software that can
help managers analyze and process data to generate forecasts.

LEARNING OBJECTIVES
1. Define forecasting and identify its principles.
2. Elaborate the steps involved in forecasting process.
3. Compute forecast.
4. Outline draft and line for forecasting.

KEY CONCEPTS
• Forecasting is an act or process of predicting future events.
• Qualitative and quantitative are the two types of method in forecasting.
• Formulas and steps are included or involved in forecasting.
• There are three basics principle of forecasting; forecast are rarely perfect,
forecast are more accurate for groups or families, and forecasts are more
accurate for shorter horizons than longer horizons.

LEARNING RESOURCES

What is forecasting?
➢ Predicting future events.
➢ Forecasting is one of the most important business functions because all other
business decisions are based on a forecast of the future. poor forecasting
results in incorrect business decisions and leaves the company unprepared to
meet future demands. the consequences can be very costly in terms of lost
sales and can even force a company out of business.
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Principles of Forecasting
➢ There are many types of forecasting models. they differ in their degree of
complexity, the amount of data they use and the way they generate the
forecast.

1. Forecasts are rarely perfect. Forecasting the future involves uncertainty.

Therefore,. It is almost impossible to make a perfect prediction the goal of
forecasting is to generate good forecasts on the average overtime and to keep
forecast error is as low as possible.

2. Forecasts are more accurate for groups or families of items. Rather than
for individual items. When items are grouped together, their individual high
and low values can cancel each other out. The data for a group of items can
be stable even when individuals items in the group are very unstable.

3. Forecasts are more accurate for shorter than longer time horizons. The
shorter the time horizon of the forecast, the lower the degree of uncertainty

Steps in the Forecasting Process

1. Decide what to forecast. For example, do we need to forecast sales or
demand? An important part of this decision is the level of detail required for
the forecast. (e.g., By product or product group), The units of the forecast
(e.g., Product units, boxes, dollars), And the time horizon (e.g., Monthly or
quarterly).

2. Evaluate and analyze appropriate data. 23 this step involves identifying

what data are needed and what data are available. This will have a big impact
on the selection of a forecasting model.

3. Select and test the Forecasting Model. Once the data have been
evaluated, the next step is to select an appropriate forecasting model.

4. Generate the forecast. Once we have selected a model, we use it to

generate the forecast.

5. Monitor forecast accuracy. Forecasting is an ongoing process. After we

have made a forecast, we should record what actually happened.

The rapid growth of information technology or (IT) Has created a forecasting

challenge for manufacturers of industry components such as microchips and
semiconductor. The companies like Intel have had difficulty in forecasting
demand for information technology used in internal application.
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Types of forecasting methods

▪ The qualitative forecasting methods – Forecast is made subjectively by the
forecaster. They are educated guesses by forecasters or experts based on
intuition, knowledge, and experience.

▪ Quantitative forecasting methods – on the other hand, are based on

mathematical modeling. Because they are mathematical, these methods are
consistent. The same model will generate the exact same forecast from the
same forecast From the same set of data every time.
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Simple mean average – the average of a set of data. One of the simplest
averaging models is the simple mean or average. Here are the forecast it’s made by
simply taking an average of all data:

Ft+1 = ΣAt = A(t) + At-1 + • • • + At-n

n n

Where
➢ Ft+1 = forecast of demand for next period, t+1
➢ At = actual value for current period, t
➢ n = number of periods or data points to be averaged
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This model is Only good for a level data pattern. As the average becomes based on
a larger data set, the random variation in the forecasts become more stable. One of
the advantages of this model is that only two historical pieces of information need to
be carried: Doesn’t mean itself in the number of observations in which the mean was
based.

Simple moving average (SMA) – Forecasting method in which only n of the most
recent observations are averaged. As new data become available, the oldest are
dropped; the number used to compute the average is kept constant. In this manner,
the simple moving average “moves” through time. The formula is as follows:

Ft+1 = ΣAt = A(t) + At-1 + • • • + At-n

n n
Where
➢ F(t+1) = forecast of demand for the next period, t+1
➢ A(t) = actual value for current period, t
➢ n = number of periods or data points used in the moving average.
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Eastern Visayas States University
Tacloban City
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Tacloban City

❖ WEIGHTED MOVING AVERAGE

➢ A forecasting method in which n of the most recent observations are
averaged and past observations may be weighted differently.

Ft+1 = next period’s forecast

Ct = weight placed on the actual value in period t
At = actual value in period t

❖ EXPONENTIAL SMOOTHING METHOD

➢ Uses a sophisticated weighted average procedure to generate a forecast.
The equation for the forecast is quite simple:
Next period’s forecast= a(current period’s actual) + (1 - a) (current period’s forecast)
In mathematical terms:
Ft+1 = aA1 + (1-a) Ft
Where,
Ft+1 = forecast of demand for next period, t 1
At = actual value for current period, t
Ft = forecast for current period, t
a = smoothing coefficient

Exponential smoothing models are the most frequently used forecasting techniques
and are available on almost all computerized forecasting software. These models are
widely used, particularly in operations management. They have been shown to
produce accurate forecasts under many conditions, yet are relatively easy to use and
understand.
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Selecting a. Note that depending on which value you select for

, you can place more weight on either the current period’s actual or the current
period’s forecast. In this manner the forecast can depend more heavily either on
what happened most recently or on the current period’s forecast. Values of
that are low—say, 0.1 or 0.2—generate forecasts that are very stable because the
model does not place much weight on the current period’s actual demand. Values of
that are high, such as 0.7 or 0.8, place a lot of weight on the current period’s actual
demand and can be influenced by random variations in the data. Thus, how
is selected is very important in getting a good forecast.
Starting the Forecasting Process with Exponential Smoothing.
One thing you may notice with exponential smoothing is that you need the current
period’s actual and current period’s forecast to make a forecast for the next period.
However, what if you are just starting the forecasting process and do not have a
value for the current period’s forecast? There are many ways to handle this problem,
but the most common is to use the naïve method to generate an initial forecast.
Another option is to average the last few periods—say, the last three or four—just to
get a starting point.
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❖ TIME SERIES MODEL

Time series model assumes that all the information needed to generate a
forecast is contained in the time series of data. A time series is as set of
observation of a variable at regular intervals overtime. It is easier to use
compared to casual models because it can be often just accurate and have the
advantages of simplicity. It can also generate a forecast more quickly compared
to casual model which require model building.
▪ Level Or Horizontal
This pattern exists when a data values shift around a constant mean. This
is considered as the simplest pattern and also the easiest to predict. This
is also common for products in the mature stage of their life cycle, wherein
demand remain steady and predictable. Example is when the sales of the
product that do not increase or decrease over time.
▪ Trend
When data exhibit an increasing or decreasing pattern over time, we say
that they exhibit trend. It is a gradual long term directional movement in the
data (growth or decline). A simplest type of this is straight line or linear
trend.
▪ Seasonality
Seasonality is a pattern that regularly repeats itself and is of a constant
length. Effects are similar variations occurring during corresponding
periods this can be quarterly, monthly, weekly, daily or even hourly
indexes.
❖ CYCLE
This is created by economic shift such as those associated with the business
cycle. Cycle is often associated with business cycles and may extend out to
several years in length.
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▪ Random Variation
This is an unpredictable effect due to chance and unusual occurrences.

Formula:
Data = level + trend + seasonality + cycles + random variations

Data= pattern + random variations

❖ FORECASTING LEVEL / HORIZONTAL PATTERNS

This is the simplest pattern and easier to predict.
▪ Naïve Method
This is the simplest method in forecasting. The forecast for the next period
is set at the actual demand for the previous period. This may be often be
used as a benchmark in order to evaluate and compare other forecast
methods.
Formula:

𝐹𝑡 + ₁ = 𝐴𝑡

Where

𝐹𝑡 + ₁ = forecast for next period, 𝑡 + 1

𝐴𝑡 = actual value for current period, 𝑡

𝑡 = current time period

Example: A restaurant is forecasting sales of chicken dinners for the month of April. Total
sales of chicken dinners for March were 320. If management uses the naïve method to
forecast, what is their forecast of chicken dinners for the month of April?
Before You Begin: Remember that with the naïve method the forecast for next period
(April) is equal to current period’s actual value, which is 320 dinners for the month of
March.
Solution:
Our equation is
𝐹𝑡 + ₁ = 𝐴𝑡

Adding the appropriate time period: 𝐹𝐴𝑝𝑟𝑖𝑙 = 𝐴𝑀𝑎𝑟𝑐ℎ

𝐹𝐴𝑝𝑟𝑖𝑙 = 320 dinners

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❖ FORECASTING TREND
The process of using market research and consumer data to create predictions
about customer's future buying habits and preferences.

▪ Trend Adjusted Exponential Smoothing

It uses 3 equations; ( 1 ) smooths out the level of the series, ( 2 ) smooths out the
trend, ( 3 ) generates a forecast adding up the findings of the two equations.

Where,
Equation 1:
a a
St= At +(1- ) (St-1+Tt-1)
FITt+1= forecast including trend for next period,
t+1
Equation 2:
St= exponentially is smoothed average of the time
Tt= β(St – St-1) + (1-β) Tt-1 series in period, t.
Equation 3: Tt= exponentially is smoothed trend of the time
series in period, t.
FITt+1= St+Tt
a = smoothing coefficient of the level.
β= smoothing coefficient of the trend.

Example 1:
Green grow is a lawn care company that uses exponential smoothing with red to
forecast monthly usage of its lawn care products. At the end of july the company
wishes to forecast sales for August. The trend to june has been 15 additional gallons
of products sold per month. Average sales have been 57 gallons per month. The
demand for july was 62 gallons. The company uses alpha= 0.20 and beta= 0.10.
make a forecast include in trend for the month of august.
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For the solution of equation 1:

Given:
Sjune= 57 gallons per month
Tjune= 15 gallons per month Sjuly = aAjuly +(1-a) (Sjune-1 + Tjune-1)
Ajuly= 62 gallons per month Sjuly= 0.20(62) + (1-0.20)(57+15)
a= 0.20 Sjuly= 0.20(62) + (0.80)(57+15)
β= 0.10 Sjuly= 70

For the solution of equation 2:

For the solution of equation 3:
Tt= β(St – St-1) + (1-β) Tt-1
FITt+1= St+Tt
Tjuly= β(Sjuly-Sjune) + (1-βTjune)
FITaugust= Sjuly+ Tjuly
Tjuly = 0.10(70-57) + (1-0.10)15
FITaugust= 70+14.8
Tjuly = 0.10(13) + 0.9(15)
FITaugust= 84.8 gallons
Tjuly = 1.3+13.5
Tjuly = 14.8

▪ Linear Trend Line

Linear trend line is a time series technique that computes a forecast with trend
by drawing a straight line through a set of data. This is useful for computing a
forecast when data display a clear trend over time. The method is simple,
easy to use, and easy to understand.
Equation: Where,

Y= a + bX Y= forecast for period X

X= the number of time periods from
X=0
a= value of X at X = 0 (Y intercept)
intercept coefficient
b= slope of the line slope coefficient
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The steps for computing the forecast using a linear trend line are as follows;

Step 1 Step 3
Compute parameter b: Generate the linear trend line
Y= a+bX
Step 4
Step 2
Generate the forecast (Y) for the
Compute parameter a appropriate value of time (X)

Example:
A manufacturer has plotted product sales over the past 4 weeks. Use a linear trend
line to generate a forecast for week 5.
Given:
Weeks X Sales Y X² XY
1 2300 1 2300
2 2400 4 4800
3 2300 9 6900
4 2500 16 10000
Totals 10 9500 30 24000
Y= 2375. X̅= 2.5
Step 1: Step 2

= 2375- 50(2.5)
=24,000-4(2.5)(2375) =2375 – 125
30-4(2.5)² a= 2250
= 24,000-4(5937.5)
30-4(2.5)² Step 4
Step 3
= 24,000-23,750 Y= a+bX
Y= a+bX the X here is the value of
30-4(2.5)² time we are looking for, that’s week Y= 2250 + 50(5)
5 to proceed to Step 4 and generate
= 250/50 the value of Y Y= 2250 + 250

b=50 =2250+50X
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Y= 2500

❖ FORECASTING SEASONALITY is the predictable variation in sales data

over a period of time.

▪ Seasonal index is the percentage by which the value for each season
is above or below the mean.
Procedure for computing the quarterly seasonality that lasts a year;
1. Calculate the average demand for each quarter or season. (Dividing total
annual demand by 4.)

2. Compute a seasonal index for every season or every year for which you have
data. (Dividing the actual demand for each season by the average demand
preseason; computed in step 1.)

3. Calculate the average seasonal index for each season. (For each season,
compute average a seasonal index by adding up the seasonal index values
for the season and dividing by the number of years.)

4. Calculate the average demand preseason for next year. (Use any ab the
methods used to compute annual demand. Then divide that by the number of
seasons to determine the average demand for next year.)

5. Multiply next year's average seasonal demand by each seasonal index. (This
will produce a forecast for each season of next year).
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Example:
U-R Smart University wants to develop forecast for next year's quarterly
enrollment. It has collected quite early enrollment for the past two years. It has
also forecast total annual enrollment for next year to be 90,000 students. What is
the forecast for each quarter of next year?

Enrollment (in thousands)

Quarter Year 1 Year 2
Fall 24 26
Winter 23 22
Spring 19 19
Summer 14 17
TOTAL 80 84
Solution:
Step 1
Year 1: 80/4 = 20 average demand per season
Year 2: 84/4 = 21 average demand per season

Step 2
Enrollment (in thousands)
Quarter Year 1 Year 2
Fall 24/20= 1.20 26/21 = 1.238
Winter 23/20 =1.15 22/21 = 1.048
Spring 19/20 = 0.95 19/21 = 0.905
Summer 14/20 = 0.70 17/21 = 0.810

Step 3
Quarter Average Seasonal Index
Fall (1.20 + 1.238) = 1.219
Winter (1.15 + 1.048) = 1.099
Spring (0.95 + 0.905) = 0.928
Summer (0.70 + 0.810) = 0.755

Step 4
90,000/4 = 22, 500
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Step 5
Quarter Forecast(Students)
Fall 22,500*1.219 = 27,429
Winter 22,500*1.099 = 24, 723
Spring 22,500*0.928 = 20, 866
Summer 22,500*0.755 = 16, 982

❖ LINEAR REGRESSION
➢ In linear regression the variable being forecast, called the dependent
variable, is related to some other variable, called the independent variable,
in a linear (or straight line) way.
➢ Procedure that models a straight-line relationship between two variables.
The steps in computing the linear regression equation are as follows:
Step 1: Compute parameter b.
b=
where Y = average of the Y values
X = average of the X values
n = number of data points
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We compute parameter b first because that calculation is needed to compute
parameter a.
The steps in computing the linear regression equation are as follows:

Example:
A maker of personalized golf shirts has been tracking the relationship
between sales and advertising dollars over the past four years. The results are as
follows:
Sales Dollar Advertising Dollars
(in thousands) (in thousands)
130 32
151 52
150 50
158 55
Use linear regression to find out what sales would be if the company invested
$53,000 in advertising for next year.
Y X XY X² Y²
130 32 4160 1024 16,900
151 52 7852 2704 22,801
150 50 7500 2500 22,500
158 55 8690 3025 24,964
Total 589 189 28,202 9,253 87,165
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❖ CORRELATION COEFFICIENT
- Statistics that measures the direction and strength of the linear relationship
between two variables.
- When performing linear regression, it is helpful to compute the correlation
coefficient, which measures the direction and strength of the linear relationship
between the independent and dependent variables. The correlation coefficient is
computed using the following equation:
Although the equation seems complicated, it is easy to compute and the values of r
can be easily interpreted. Values of r range between – 1 and + 1 and have the
following meanings:
R = + 1: There is a perfect positive linear relationship between the two variables. For
every 1-unit increase in the independent variable, there is a 1-unit increase in the
dependent variable.
R = -1: There is a perfect negative linear relationship between two variables. Just
because the relationship is negative does not mean that there is no relationship. It is
still a linear relationship except that it is negative; the two variables move in opposite
directions. A unit increase in the independent variable is accompanied by a unit
decrease in the dependent variable.
R = 0: There is no linear relationship between the variables.
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Example:
A maker of personalized golf shirts has been tracking the relationship between sales
and advertising dollars over the past four years. The results are as follows:

Sales Dollar Advertising Dollars

(in thousands) (in thousands)
130 32
151 52
150 50
158 55

❖ MULTIPLE REGRESSION
- Multiple regression is an extension of the linear regression. However, unlike in
linear regression where the dependent variable is related to one independent
variable, multiple regression develops a relationship between a dependent
variable and multiple independent variables. The general formula for multiple
regression is as follows:
Y= B0 + B1X1 + B2X2 + • • • + BkXk
Where Y = dependent variable
B0 = the Y intercept
B1 • • • Bk = coefficients that represent the influence of the independent variables on
the dependent variable
X1 • • • Xk = independent variables

❖ MEASURING FORECAST ACCURACY

▪ Forecast Accuracy Measures is the difference between forecast and
actual value for a given period.
Et = At – Ft
Where,
Et= forecast error for period t
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At= actual value for period t
Ft= forecast for period t
Most common errors are;

o Mean Absolute Deviation (MAD) is the measure of forecast error that

computes error as the average of the sum of the absolute errors.
Formula: MAD= Σ|aactual-forecast
n
o Mean Squared Error (MSE) is the measure of forecast error that computes
error as the average of the squared error.
Formula: MSE= Σ|aactual-forecast
n
Example:
Standard parts corporation is comparing the accuracy of two methods that it has
used to forecast sales of its popular valve. Forecast using method A and method B
are shown against the actual values for January to May. Which method provided
better forecast accuracy?
Month Actual Forecast Error Error Error Forecast Error Error Error²
Sales
Jan. 30 28 2 2 4 30 0 0 0
Feb. 26 25 1 1 1 28 -2 2 4
March 32 32 0 0 0 36 -4 4 16
April 29 30 -1 1 1 30 -1 1 1
May 31 30 1 1 1 28 3 3 9
Total 3 5 7 -6 10 30

MAD= Σ|actual-forecast|/n MAD= Σ|actual-forecast|/n

=5/5 = 10/5
MAD= 1 MAD= 2

MSE= Σ|actual-forecast|/n MSE= Σ|actual-forecast|/n

= 7/5 = 30/5
MSE= 1.4 MSE= 6
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❖ TRACKING SIGNAL
➢ A tracking signal is a tool used to monitor the quality a forecast.

➢ A forecast bias is a persistent tendency for a forecast to be over or under the

actual value of the data.

▪ Selecting the Right Forecasting Model

o Amount and type of available data play a large role in the type of model
that can be considered. Forecasting data should be quantifiable if we are
going to talk about the amount and type of available data.

o Degree of accuracy required the type of model selected is related to the

degree of accuracy required.

o Length of Forecast Horizon it is very important to select the correct

model for the forecast to horizon being used. Some forecasting models are
better suited to short forecast horizons, whereas others are better for long
horizons.

o Data pattern present it is very important to identify the patterns in the

data and select the appropriate model.
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❖ FORECASTING SOFTWARE
➢ Most forecasting software packages fall into one of three categories: (1)
spreadsheets, (2) statistics packages, and (3) specialty forecasting
packages.

▪ Spreadsheets
Spreadsheets, such as Microsoft Excel ®, Quattro Pro®, and Lotus 1-2-3®,
are prevalent in business, and most people are familiar with at least one of
them. These packages provide basic forecast capability, such as simple
exponential smoothing and regression. This involves analyzing the data for
patterns, studying relationships among variables, monitoring forecast errors,
and evaluating the performance of different forecasting models. Unfortunately,
spreadsheets do not offer this capability as readily as packages designed
specifically for forecasting.
▪ Statistical Packages
Statistical software includes packages designed primarily for statistical
analysis, such as SPSS, SAS, NCSS, and Minitab. Almost all of these
packages also offer forecasting capabilities, as well as extensive data
analysis capability. Overall, these packages offer large capability and a variety
of options. However, their many features can be overwhelming for someone
interested only in forecasting. Statistical software packages are best for a user
who seeks many statistical and graphical capabilities in addition to forecasting
features.
▪ Specialty Forecasting Packages
Specialized forecasting software is specifically intended for forecasting use.
These packages often provide an extensive range of forecasting capability,
though they may not offer large statistical analysis capability. Popular
packages include Forecast Master, Forecast Pro, SIBYL/Runner, Autobox,
and SCA. Some of these packages offer a wide range of forecasting models,
whereas others specialize in a particular model category. Forecasters who
need extensive statistical analysis capability may need to use a statistical
package in addition to the forecasting package.

Guidelines for Selecting Forecasting Software

There are many forecasting software packages to choose from, and the process can
be overwhelming. Following are some guidelines for selecting the right package.
1. Does the package have the facilities you want? The first question is to ask is
whether the forecasting methods you are considering using are available in
the package. Other issues to consider are the software’s graphics capabilities,
data management, and reporting facilities. You need to consider how
important these are given the purpose of the forecasts you will be generating.
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2. What platform is the package available for? You obviously need to make sure that
the software is available for the platform you are using. Also, it maybe necessary to
consider the availability for multiple platforms, depending on who will use the
software and whether there will be transferring files.
3. How easy is the package to learn and use? Some packages offer many
capabilities but may be hard to use. Generally, the more comprehensive the array of
capabilities, the more difficult the package is to use. Make sure that you can master
the software. Also check the ease of importing and exporting data.
4. Is it possible to implement new methods? Often forecasters prefer to modify
existing methods to fit their particular needs. Many forecasting packages allow the
addition of new models or the modification of existing ones through a programming
language.
5. Do you require interactive repetitive forecasting? In many operations management
situations we need to make forecasts for hundreds of items on a regular basis, such
as monthly or quarterly. For these situations it is very useful to have a ‘batch”
forecasting capability. This is not necessary, however, for forecasts that are
generated with the forecaster.
6. Do you have very large data sets? Almost all packages have a limit on how many
variables and how many observations can be processed. Sometimes very powerful
forecasting packages can handle only relatively small data sets. Make sure the
package you purchase is capable of processing the data you need.
7. Is there any local support? Make sure there is ample documentation and good
technical support, and check for any other local support that may be available.
Remember that all packages can encounter glitches. A number of forecasting
vendors offer seminars, and there are often courses that can be taken for the more
popular methods, such as SAS and SPSS.
8. Does the package give the right answers? Most people assume that a computer
package will generate correct results. However, this is not always the case. There
are small differences in output between different packages due to differences in
algorithms used for computing. Some differences can result from actual errors in the
programs, especially when large data sets are used. One recommendations to
compare output from the software against published results or against output from
another package.

❖ FOCUS FORECASTING

This approach was developed by Bernie Smith who argues that statistical
methods do not work well for forecasting. Smith believes some simple rules
that worked well in the past that are best to be used to forecast the future.
Focus forecasting is a forecasting approach which gained a lot of popularity in
business. The idea behind this is to test these rules on the past and evaluate
how they perform.
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The following are the example of rules:

1. We will sell over the next three months what we sold over the last three
months.

2. What we sold in a three-month period last year, we will sell in the same
three month period this year.

3. We will sell over the next three months 5 percent of what we sold over
the last three months.

4. We will sell over the next three months 15 percent of what we sold over
the same three-month period last year.
In this approach, managers can come up well any rules that they believe will reflect
accurate forecasts in their business.

❖ COMBINING FORECAST

This approach means that in order to show result in improved forecast accuracy is to
combine forecasts from two or more different forecasting methods. Studies have
shown that combining forecast can lead to forecast accuracy that is better than that
of the individual forecast. Forecasting methods that are combined should be different
and can even be based on different information data. Simple average of the
individual forecasts can be used as one of the simplest ways to combine; this has
shown to be very effective in improving the accuracy of the forecast.

❖ COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT

This is a collaborative process between two trading partners that establishes formal
guidelines for joint forecasting and planning. The premise behind this is that
companies can be more successful if they join forces to bring value to their
customers, share risks of the marketplace, and improve their performances. By
implementing CPFR, trading partners jointly set forecasts, plan production, replenish
inventories, and evaluate their success in the marketplace.
The following are the nine-step process that CPFR utilizes:

1. Establish collaborative relationships. Buyers and sellers formally establish

their relationship, including expectations and performance measures. This is
usually reevaluated annually.

2. Create a joint business plan. Buyers and sellers develop a joint business plan.

3. Create a sales forecast. Sales forecasts are generated based on available

data. This is usually done monthly or weekly.
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4. Identify exceptions for sales forecasts. Items that are exceptions to the sales
forecast are identified.

5. Resolve/collaborate or exceptions to sales forecasts. Buyers and sellers

jointly investigate exceptions by analyzing shared data.

6. Create order forecast. An order forecast is generated that supports the shared
sales forecast and joint business plan.

7. Identify exceptions for order forecast. Buyers and sellers jointly identify which
items are exceptions to the order forecast.

8. Resolve/collaborate on exceptions to order forecast. Exceptions are identified

and resolved by analyzing shared data.

9. Generate order. Usually performed weekly or daily.

Most of these steps are performed on a weekly or monthly basis, and the agreement
between parties is evaluated annually. It is obvious that a large amount of time is
spent jointly identifying and reconciling exceptions, with the focus on supporting the
jointly set business plan. Note that CPFR is an iterative process which means that it
is done over and over again.

❖ FORECASTING WITHIN OPERATIONS MANAGEMENT

-Forecast does not only impact other business functions but also all other operations
decisions. Operation managers make many forecasts, such as the expected demand
for a company’s product. These forecasts are then used in determining the product
design which are expected to sell, the quantity of product to produce and the amount
of supplies and materials that are needed. Companies’ uses forecast in identifying
future space requirements, capacity and location needs and the amount of labor
needed. Forecasts drive strategic operations decisions, such as choice of
competitive priorities, changes in processes and the large technology purchases.
This also serves as the basis for tactical planning, such as developing worker
schedules. Virtually, all operations management decisions are based on forecast of
the future.

❖ FORECASTING ACROSS ORGANIZATION

- Forecasting is an excellent example of an activity that is critical to the management

of all functional area within a company. In a business organization, forecasts are
made in virtually every function and at every organizational level. Budgets are set,
resources allocated and schedule made based on forecasts. Without a forecast of
the future, a company would not be able to make any plans, including day-to-day
and long-range plans.
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Eastern Visayas States University
Tacloban City

The following explains how forecasting affects other functions of organization:

• Marketing- this relies heavily on forecasting tools to generate forecasts of

demand and future sales. This also needs to forecast sizes of markets, new
competitors, future trends, and change in consumer preferences.

• Finance- this uses tools of forecasting to predict stock prices, financial

performance, capital investment needs, and investment portfolio returns. The
accuracy of demand forecasts, in turn, affects the ability of finance to plan
future cash flow and financial needs.
• Information Systems- this plays an important role in the forecasting process.
Today, forecasting requires sharing of information and databases not only
within a business but also between business entities.

• Human Resources- this relies on forecasting to determine future hiring

requirements. Forecasts are made of the job market, labor skill availability,
future wages and compensation, hiring, and layoffs costs, and training costs.
In order to recruit proper talent, forecast is necessary to identify labor needs
and availability.

STUDY QUESTIONS

1. Are forecast needed to be accurate?

2. Forecasting has steps in every process, what is the significance of following
the steps in forecasting?
3. How can forecast help your daily life? What is the significance of having to
forecast something?
 Republic of the Philippines
Eastern Visayas States University
Tacloban City

LEARNING ACTIVITIES

DIRECTIONS: Identify what is being asked in the following

sentences.
____________1. This is an estimation of the occurrence, timing
or magnitude of uncertain future events.
____________2. This is a method of forecasting that is based
on mathematics, consistent and objective.
____________3. A method of forecasting that is based on
human judgment, opinion; subjective and nonmathematical.
____________4. It is a gradual long term directional movement
in the data (growth or decline).
____________5. This pattern exits when data values shift
around a constant mean.
____________6. This is the average of a set of data.
____________7. This model assumes that all the information
needed to generate a forecast is contained in a time series of
data.
____________8. A time series technique which computes a
forecast with trend by drawing a straight line through a set of
data.
____________9. Is the predictable variation in sales data over
a period of time.
____________10. It is the measure of forecast error that
computes error as the average of the squared error.
 Republic of the Philippines
Eastern Visayas States University
Tacloban City

SUMMARY
Forecasting is one of the most business functions because all other business
decisions are based on a forecast of the future. Forecasts are so important that
companies are investing billions of dollars in technologies that can help them better
for the future.
We have discussed the principles of forecasting, how to forecast, and different types
of qualitative and quantitative forecasting models. Qualitative forecasting models
generate a forecast based on the subjective opinion of the forecaster. Quantitative
forecasting models are based on mathematical modeling. They can be divided into
two categories: time series models and causal models. We have also learned about
different types of patterns present in the data. Time series models are based on the
assumption that all information needed for forecasting is contained in the time series
of data. There are four patterns of data: level or horizontal, trend, seasonality, and
cycles. In addition, data usually contain random variation. We should understand that
to obtain a good forecast the forecasting model should be matched to the patterns in
the available data. Our example of the moving average shows what happens when
the data show of trend but the model selected is useful only for forecasting a level
patterns. In the next selection we turn to quantitative models that can be used for
other data patterns, such as trend and seasonality. However, remember that the
models already discussed are the foundation of forecasting.

Forecasting seasonality requires a procedure in which we compute a seasonal

index, the percentage by which each season is above or below the mean. The three
useful measures of forecast accuracy are mean absolute deviation (MAD), mean
square error (MSE), and tracking signal. There are four factors to consider when
selecting a forecasting model: the amount and type of data available, the degree of
accuracy required, the length of forecast horizon, and patterns present in the data.
 Republic of the Philippines
Eastern Visayas States University
Tacloban City

REFERENCE
Anonymous. (2021, August 25). Trend Forecasting: What It Is and How To Use It
(With Tips) - Indeed.
https://www.flaunter.com/blog/trend_forecasting/#:~:text=Trend%20Forecasting%20i
s%20the%20process,'vision'%20of%20the%20future.
Book 1: Operations Management 5th Edition

ANSWER KEY:

1. Forecasting
2. Qualitative Method
3. Quantitative Method
4. Trend
5. Level or Horizontal

6. Simple Mean Average

7. Time Series Model
8. Linear Trend Line
9. Forecasting Seasonality
10. Mean Squared error