Forecasting: Industrial Management & Engineering Economy (Ieng 5241)

Woldia University
School of Mechanical And Chemical Engineering

Institute of Technology
Department of Mechanical Engineering
Industrial Management &

Engineering Economy (IEng 5241)
Forecasting
Chapters-2
01/08/2021 1
Chapter 3:
Forecasting
3.1 Meaning and Use of Forecasting

3.2 Useful forecasting model
01/08/2021 2
Introduction
• All decisions about the process – and about every other
aspect of planning – depend on future product demand.
• However, the demand for a product varies over time,
and there is usually no way of knowing exactly what will
be at any point in the future. The best anyone can do is
to make a forecast of the likely value.
• Forecasts estimate the future levels of demand for
products.
• Production planning sets the future levels of production,
and organizes the resources needed to achieve these.
01/08/2021 3
Introduction…
Good forecasts enable managers to plan and budget for
appropriate levels of personnel, raw materials, capital,
inventory and a lot of other variables.
01/08/2021 4
Meaning of forecasting
In Industrial management, Forecast is an assessment of

the expected pattern of future events and the way(s) in
which they might have effects on the operations of the
enterprise, or section of it.
It is not possible to anticipate or to foresee the future
exactly; but the more accurate the forecasting the lower
will be the possibilities of formulating reliable plans; and,
in consequence the greater will be the chances of
achieving the enterprise’s objectives.
01/08/2021 5
Use of forecast
Forecasting:
- is an essential component of planning by managers;
- It helps to deal successfully with expected future
events, and to take steps to deal with any problems
which are anticipated to arise in the future or even to
avoid them before they arise.
01/08/2021 6
Forecasting techniques
There are basically two broad categories of forecasting

techniques. These are:
 Qualitative Methods
 Quantitative Forecasting Methods;
01/08/2021 7
Qualitative Methods
- Qualitative/Judgemental forecasts are based on

subjective views, often the opinions of experts in the
field.
- It used when sufficient information and data is not
available;
- There are different ways of forecasting future demand
based on qualitative methods. This includes:
A. Delphi method
- The technique draws on a panel of experts;
- Conducted in the way that eliminate possible
dominance of the most verbal or prestigious person
01/08/2021 8
Qualitative Methods…
B. Jury of executive opinion

- is the method by which the relevant opinions of experts are
taken, combined and averaged;
- is fast, less expensive and does not depend up on any
elaborate statistics and brings in specialized view points;
C. Market survey
- involves the use of questionnaires, formation of consumer
panels, and testing of new products and services;
- It identifies the nature of the consumer consumption;
- A forecast is developed after determining how general sales
vary with differences in market location, buyer occupation,
commodity prices, quantity, quality consumer income, and
other factor.
01/08/2021 9
D. Opinions of Salesperson
- involves the opinions of the sales force and these
opinions are primarily taken into consideration for
forecasting future sales;
- are good for short range planning since sales people are
not sufficiently sophisticated to predict long term trends;
E. Historical Analogy and life cycle Analysis
- Use the product life cycle analysis (i.e. introduction,
growth, maturity and decline) for future demand;
01/08/2021 10
Each of the above qualitative/ judgmental methods
works best in different circumstances. If a quick reply is
needed, Opinions of Salesperson is the fastest and
cheapest method. If reliable forecasts are needed, it
may be worth the time and effort of organizing a
market survey or Delphi method.
01/08/2021 11
Quantitative Methods
- use statistical analysis and other mathematical models to

predict future events;
- includes time series/Projective Method and Casual
forecasting Method.
A. Time Series forecasting Methods
- It is based on the assumption that past activities are good
indication of future activities;
- For e.g. If demand for a product over the past three weeks
has been 100, 110 and 120 units, it seems reasonable to
suggest that demand next week will be around 130 units.
01/08/2021 12
Quantitative Methods…
The components of a time series are generally
classified as
• Trend , T is a gradual long-term directional
movement in the data (growth or decline).
• Seasonal , S effects are similar variations
occurring during corresponding periods, e.g.,
December retail sales. Seasonal can be
quarterly, monthly, weekly, daily, or even
hourly indexes.
01/08/2021 13
• Cyclical ,C factors are the long-term swings

about the trend line. They are often associated
with business cycles and may extend out to
several years in length.
• Random ,R component are unpredictable effects
due to chance and unusual occurrences.
01/08/2021 14
Following are the steps in time series forecasting:

• Plot historical data to confirm relationship (e.g., linear,
exponential).
• Develop a trend equation (T) to describe the data.
• Develop a seasonal index (SI, e.g., monthly index values).
• Project trend into the future (e.g., monthly trend values).
• Multiply trend values by corresponding seasonal index
values.
• Modify projected values by any knowledge of :( C)
Cyclical business conditions, (R) Anticipated irregular
effects.
01/08/2021 15
Methods of time series forecasting includes the

following:
A. Moving Averages
- is obtained by summing and averaging the values from
a given number of periods repetitively, each time
deleting the oldest value and adding a new value;
- smooth out fluctuations in any data, while preserving
the general pattern of the data (longer averages result
in more smoothing);
01/08/2021 16
01/08/2021 17
Where, n= the chosen number of periods

t= 1 is the oldest period in the n-period average
Di= the demand in the ith period.
Draw back of Moving average
- all historical values are given the same weight; and
method only works well with stable demand.
01/08/2021 18
Example: 2.1. Shipments (in tons) of welded tube by an

aluminum producer are shown below:
Prepare a forecast using three years and a five years

moving average to forecast the fourth year and the
sixth year of demand.
01/08/2021 19
Year Shipment 3-year moving 3-year MA 5-year moving 5-year MA
(tons) total total
1 2 - - - -
2 3 - - - -
3 6 11 3.7 - -
4 10 19 6.3 - -
5 8 24 8.0 29 5.8
6 7 25 8.3 34 6.8
7 12 27 9.0
8 14 33 11.0
9 14 40 13.3
10 18 46 15.3
11 19 51 17.3
01/08/2021 20
B. Weighted moving average (MAw)

- It allows some values to be emphasized by varying the
weights assigned to each component of the average;
- This model allows uneven weighting of demand.
01/08/2021 21
Example: 2.2 using a weight of 3 for the most recent

data, 2 for the next, and 1 for the oldest, forecast
shipments in year 12 for the above example 2.1.
Solution:
01/08/2021 22
Or WMA=each period’s times a weight, summed overall

periods in the moving average
Where, Ct is between 0 and1
01/08/2021 23
For example, in the previous example, n is three years;

we could weight the most recent period twice as
heavily as the other periods by setting C1=0.25,
C2=0.25, C3=0.5. Thus, a forecast of demand for the
twelfth year using a three-period model with the
most recent period’s demand weighted twice heavily
as each of the previous two years’ demand is:
01/08/2021 24
C. Exponential smoothing
-It is based on the idea that as data gets older it becomes
less relevant and should be given less weight.
- is a modified moving average forecasting technique,
weighing each past data exponentially, so that the most
recent data carry more weight in the moving average
and the weight placed on successively older periods
decrease exponentially.
01/08/2021 25
Where, α= the smoothing constant and α is

between 0 and 1
t= the period
At-1 :last period actual demand
Ft-1 , last period forecast
Ft forecast
01/08/2021 26
The selection of α depends up on the

characteristics of demand. High values of α are
more liable to fluctuations in demand. Low
values of α are an appropriate for relatively
stable demand but with a high amount of
random variation.
01/08/2021 27
Example: 2.3. HiTek computer services repairs and

services personal computers at its store, and makes local
service calls. It primarily uses part – time State University
students as technicians. The company has had steady
growth since it started. It purchases generic computer
parts in volume at a discount from variety of sources
whenever they see a good deal. Thus, they need a good
forecast of demand for repairs so that they will know
how many computer component parts to purchase and
stock, and how many technicians to hire.
01/08/2021 28
The company has accumulated the demand data shown

in the accompanying table for repair and service calls
for the past 12 months, from which it wants to consider
exponential smoothing forecasts using smoothing
constants (α) equal to 0.30 and 0.50.
01/08/2021 29
PERIOD MONTH DEMAND

1 Jan 37
2 Feb 40
3 March 41
4 April 37
5 May 45
6 June 50
7 July 43
8 August 47
9 Sep 56
10 Oct 52
11 Nov 55
12 Dec 54
01/08/2021 30
Solution
F2 = F3 =
= (0.30)(37) + (0.70)(37) = (0.30)(40) + (0.70)(37)
= 37 = 37.9
F13 =
= (0.30)(54) + (0.70)(50.84)
= 51.79
01/08/2021 31
FORECAST, Ft + 1
PERIOD MONTH DEMAND (a = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61
01/08/2021 32
Causal Forecasting Methods

- It has a higher degree of accuracy due to the
fact that it measures the fundamental factors
and asserts their relationships to the products
under consideration.
- It is used for a short and medium range
forecasting of the existing products, services,
marketing strategies, production and facility
planning.
01/08/2021 33
Regression methods
-is used for forecasting by establishing a mathematical
relationship between two or more variables.
- Here we need to identifying relationships between
variables and demand;
01/08/2021 34
- If we know that something has caused demand to

behave in a certain way in the past, we would like to
identify that relationship so if the same thing happens
again in the future, we can predict what demand will
be.
- For example, there is a relationship between
increased demand in new housing and lower interest
rates. Correspondingly, a whole myriad of building
products and services display increased demand if
new housing starts increase.
01/08/2021 35
- The simplest form of regression is linear

regression
- Linear regression: is a mathematical technique
that relates an independent variable to
dependent variable, in the form of an equation
for a straight line.
01/08/2021 36
A linear equation has the following general form;
Where, y= Predicted (dependent) variable

x = Predictor (independent) variable
b = Slope of the line
a = the intercept
- To develop the linear equation, first we have to
calculate a, and b;
01/08/2021 37
Example 2.4: The general manager of a building

materials production plant feels that the demand for
plasterboard shipments may be related to the number
of construction permits issued in the county during the
previous quarter. The manager has collected the data
shown in Table below
(a) Compute values for the slope b and intercept a.
(b) Determine a point estimate for plasterboard
shipments when the number of construction permits is
30.
01/08/2021 38
01/08/2021 39
Solution: a)
01/08/2021 40
01/08/2021 41
The choice of forecasting method depends on

the following factors:
- The time covered by the forecast;
- Availability and relevance of historical data;
- Type of product, particularly the balance
between goods and services;
- Variability of demand;
- Accuracy needed and cost of errors;
- Benefits expected from the forecasts; and
- Amount of money and time available.
01/08/2021 42
End of Chapter Two
Thank You For your
attention!!!
01/08/2021 43

Forecasting: Industrial Management & Engineering Economy (Ieng 5241)

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Woldia University

School of Mechanical And Chemical Engineering

Industrial Management &

3.1 Meaning and Use of Forecasting

In Industrial management, Forecast is an assessment of

There are basically two broad categories of forecasting

- Qualitative/Judgemental forecasts are based on

B. Jury of executive opinion

- use statistical analysis and other mathematical models to

• Cyclical ,C factors are the long-term swings

Following are the steps in time series forecasting:

Methods of time series forecasting includes the

Where, n= the chosen number of periods

Example: 2.1. Shipments (in tons) of welded tube by an

Prepare a forecast using three years and a five years

B. Weighted moving average (MAw)

- This model allows uneven weighting of demand.

Example: 2.2 using a weight of 3 for the most recent

Or WMA=each period’s times a weight, summed overall

Where, Ct is between 0 and1

For example, in the previous example, n is three years;

Where, α= the smoothing constant and α is

The selection of α depends up on the

Example: 2.3. HiTek computer services repairs and

The company has accumulated the demand data shown

PERIOD MONTH DEMAND

PERIOD MONTH DEMAND (a = 0.3) ( = 0.5)

2 Feb 40 37.00 37.00

3 Mar 41 37.90 38.50

4 Apr 37 38.83 39.75

5 May 45 38.28 38.37

6 Jun 50 40.29 41.68

7 Jul 43 43.20 45.84

8 Aug 47 43.14 44.42

9 Sep 56 44.30 45.71

10 Oct 52 47.81 50.85

11 Nov 55 49.06 51.42

12 Dec 54 50.84 53.21

13 Jan – 51.79 53.61

Causal Forecasting Methods

- If we know that something has caused demand to

- The simplest form of regression is linear

A linear equation has the following general form;

Where, y= Predicted (dependent) variable

Example 2.4: The general manager of a building

The choice of forecasting method depends on

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