FORECASTING

WHAT IS FORECASTING?

 Forecasting is the process of projecting past sales demand

into the future. Implementing a forecasting system
enables you to assess current market trends and sales
quickly so that you can make informed decisions about
the operations. You can use forecasts to make planning
decisions about: Customer orders. Inventory.
IMPORTANCE OF FORECASTING

 Forecasts help anticipate change within the market

 By having insight into not only current data but projections of what
could happen in the future, businesses can make better adjustments.
Forecasts help businesses optimize their strategies and alter their
current operations to change potential outcomes.
MAIN PURPOSE OF FORECASTING

 Prediction is concerned with future certainty; forecasting

looks at how hidden currents in the present signal
possible changes in direction for companies, societies, or
the world at large. Thus, the primary goal of forecasting is
to identify the full range of possibilities, not a limited set
of illusory certainties.
What are the different forecasting models?

 Forecasting in operations varies according to the available data,

industry size and respective goals. The three common forecasting
models we discuss here use both qualitative and quantitative data.
Although they are useful in making educated predictions, there is
usually some degree of forecast error involved, which makes it
important to use them with caution.
Qualitative forecasting method

 1. Judgmental: This type of forecast uses subjective inputs. This

includes the Delphi method wherein subject matter experts predict
trends based on their knowledge and experience. A few other
techniques involve scenario building, and statistical surveys which
are also based on intuition and a collection of opinions from
managers and experts.
Quantitative forecasting method

 2. Time series:
 Time series forecasts use historical data to make predictions about
the future. Data corresponds to a specific period, such as monthly
inputs over a span of ten years. These forecasts rely on the
assumption that past patterns will repeat in the future, so these data
inputs are used to create long term forecasts. This method is
particularly useful while doing demand forecasting.
3. Associative models

 Associative models attempt to identify different variables and

understand their association with each other. One of the most
common associative models used is regression analysis, by which
you can understand the relationship between two variables in a
dataset. For example: the impact of inventory stock on profitability.
You could use statistical analysis software to conduct such
quantitative forecasts. You can effectively use this method for
conducting business forecasting.
Another forecasting technique which
businesses can use is to predict events
over different time horizons:
 Short range: These forecasts are usually 3 months into the future. They are most
often used for making decisions regarding hiring, scheduling, and determining
production levels.

 Medium range: This is usually 3 months to a year into the future. These
forecasts are used for budgeting, sales and demand planning.

 Long range: These forecast 3 years or more into the future. It's used for capital
expenditures, relocation and expansion, and research and development.
What are the different types of forecasts?

 Economic forecasts: Make predictions related to inflation, money supplies, and other
economic factors that can affect businesses and production schedules. These forecasts
often influence medium to long-range planning.
 Technological forecasts: Keep track of rate of technological progress. As technologies
mature and become more applicable to business use cases, you may want to invest in new
facilities, equipment and processes. These forecasts impact long-range planning.
 Demand forecasts: Estimate consumer demand for a business' products or services. You
can use a demand forecast to estimate production and all relevant inputs including the
quantity of raw materials or number of workforce required. These forecasts can impact
short, medium, and long-term planning. These are also referred to as sales forecasts.
Which forecasts are used in operations
management?

 Run rate/Historical forecasting: The method uses historical data to predict trends. This
is useful to extrapolate demand patterns, availability of resources at different times, and
financial liabilities at different stages of the production process. It is one of the most
commonly used forecasting methods by organizations, as per a report by Gartner (full
report available for Gartner clients).
 Driver-based forecasting: This method uses key operational metrics to predict the
obtainable output. For example, throughput, i.e. the rate of production of a plant or a
machine can give a fair idea of the capacity to meet supply requirements. A few other
metrics which you can use to do driver-based forecasting include share of accurate
production (first-pass yield), average time taken to produce a unit (cycle time) and
average time a machine stays unavailable for use (downtime).
 Risk-based forecasting: This approach assesses the possible risks that the process could run into, such as strikes, machine
failures, budget outruns, etc, and plans ahead in time to mitigate, if not all, some of these factors.

 Using one or more of the above-mentioned methods, these are the two most important metrics which you might want to
consider for forecasting to ensure a seamless production process.

 Scheduling: Staff and inventory scheduling are critical functions to meet demand. This process involves organizing,
selecting, and allocating the necessary resources to complete the desired outputs over a period of time. In a service business,
for example, you can use a forecast to ensure there are enough front office employees to meet the fluctuating demand that
often involves attending to immediate customer service requests.

 Material requirements planning (MRP): This system is used to calculate the materials needed to manufacture a final
product. MRP requires you to manage inventory, determine if any additional materials are needed, and schedule production.
 How to implement forecasting in operations
management?

 Conduct short-term forecasts for more accurate results: Short-term forecasts use
more quantitative data and require a lot less foresight than long term forecasts. More
time allows for more unpredictable events, like changes in competition.
 Acknowledge that all forecasts carry some level of error: No one has the key to
predicting the future. No matter how much data your business has, and how accurate
it is, forecasts include assumptions, leaving room for error. Take this into account in
your planning.
 Prefer aggregate forecasts to disaggregate forecasts: The larger the dataset, the more likely
that anomalies can be smoothed out. For example, sales in a single store are more difficult to
predict than sales in the whole state. Therefore, try grouping datasets (sales of multiple stores) to
create aggregate forecasts, which are relatively more accurate.
 Keep it simple: If you have a forecast that uses the data you have and is pretty accurate, it's
probably worth sticking with it. A more complex forecast will not necessarily yield better results.
 Use software to analyze datasets: Analyzing data to create trends which can be extrapolated
for the future can be complex. Invest in a suitable predictive analytics software to make more
accurate predictions to ensure success for your business.
SOURCE

 https://www.getapp.com/resources/what-is-forecasting-in-operations-management/