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OM Lecture 3
OM Lecture 3
BUSINESS ADMINISTRATION
DEPARTMENT
COURSE INSTRUCTOR:
SHAGUFTA SALEEM SHAIKH
Underlying basis of
??
all business
decisions
Production
Inventory
Facilities
What is Forecasting?
Webster's: “A forecast is a prediction and its
purpose is to calculate and predict some
future events or condition.”
Neter & Wasserman, “business forecasting is
refers to a statistical analysis of the past and
current movements in the given time series
so as to obtain clues about the future
pattern of those movements.
Forecasting Time Horizons
Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce levels,
job assignments, production levels
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location, research
and development
Types of Forecasts
Economic forecasts:
It Address business cycle by predicting inflation rate,
money supply, housing starts, and other planning
indicators.
Technological forecasts:
These are concerned with rates of technological
progress, which can result in the birth of exciting
new products, requiring new plants and equipments.
Demand forecasts
These are forecasts , also called sales forecasts,
drive a company’s production, capacity, and
scheduling systems and serve as inputs to financial,
marketing, and personnel planning.
Strategic Importance of
Forecasting
Human Resources – Hiring, training,
laying off workers
MIS IT systems
2. Naive approach
3. Moving averages
Time-Series
4. Exponential Models
smoothing
1. Trend Projections
^
y = a + bx
^
y = a + bx
Sxy - nxy
b=
Sx2 - nx2
a = y - bx
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11
May 19 (12 + 13 + 16)/3 = 13
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19
Graph of Moving Average
Moving
Average
30 – Forecast
28 –
Actual
26 – Sales
24 –
Shed Sales
22 –
20 –
18 –
16 –
14 –
12 –
10 –
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J F M A M J J A S O N D
© 2014 Pearson Education, Inc. 8 - 33
Weighted Moving Average
Weighted Moving
3 Average
Last month
2 Two months ago
1 Three months ago
6 Sum of weights
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
Moving Average And
Weighted Moving Average
Weighted
30 – moving
average
25 –
Sales demand
20 – Actual
sales
15 –
Moving
10 – average
5 –
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J F M A M J J A S O N D
© 2014 Pearson Education, Inc. 8 - 36
4. Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant ()
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past
data
Exponential Smoothing
Ft = Ft – 1 + (At – 1 - Ft – 1)
where Ft = new forecast
Ft – 1 = previous forecast
= smoothing (or weighting)
constant (0 1)
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
Introduction
Growth
Maturity
Decline