Forecasting

Lecture
(26-08-21)

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 Schematic model of Production system
(Demand)
(4. Facility Location and 5. layout)

Forecasting 7. SCM

Transformation
Activities
Personnel Legal and
E 1. Product design and 3. social
N E
process planning
V O Marketing N
I I 9. Production control U and public V
N Material and Goods and T I
R Engineering relations
P equipment Services P R
O Aggregate Material Scheduling
N U Requirement U O
planning and control
M T planning T N
E S S M
N Finance E
10. Maintenance Accounting N
T
T

8. Inventory 2. Quality Cost

Control Control Control

Feed back
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Walt Disney Parks and Resorts

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 Forecasting Provides a Competitive
Advantage for Disney
► Global portfolio includes parks in Hong Kong, Paris, Tokyo,
Orlando(Florida), and Anaheim(California).
► Revenues are derived from people – how many visitors and how they
spend their money
► Daily management report contains only the forecast and actual
attendance at each park.
► Disney generates daily, weekly, monthly, annual, and 5-year
forecasts
► Forecast used by labor management, maintenance, operations,
finance, and park scheduling
► Forecast used to adjust opening times, rides, shows, staffing
levels, and guests admitted

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► 20% of customers come from outside the USA, Economic model includes
gross domestic product, cross-exchange rates, arrivals into the USA
etc.
► A staff of 35 analysts and 70 field people survey 1 million park guests,
employees, and travel professionals each year
► Inputs to the forecasting model include airline specials, Federal Reserve
policies, Wall Street trends, vacation/holiday schedules for 3,000 school
districts around the world
► Average forecast error for the 5-year forecast is 5%
► Average forecast error for annual forecasts is between 0% and 3%

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 Agenda
• Global Company Profile: Walt Disney Parks & Resorts
• What is Forecasting?
• The Strategic Importance of Forecasting
• Seven Steps in the Forecasting System
• Forecasting Approaches
• Time-Series Forecasting
• Associative Forecasting Methods: Regression and Correlation Analysis
• Monitoring and Controlling Forecasts

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 What is Forecasting?
• Forecasting is the prediction, projection or estimation of the occurrences
of uncertain future events or level of activity.

• The events may be sales, breakdowns, demand rejections etc.

• It is used for predicting Demand, Revenues, Costs, Profits, Prices,

Technological changes, Environment problems, Rainfall, etc.

• It is the underlying basis of all decisions in the production system.

➢ Production

➢ Inventory
➢ Personnel
➢ Facilities

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 Forecasting Time Horizons
1. Short-range forecast(3 months – 1 year)
► It consists of purchase planning,, workforce levels, production
levels, job scheduling, job assignments etc.
2. Medium-range forecast(6 months to 3 years)
► It involves sales and production planning, budgeting etc.
3. Long-range forecast (3+ years)
► It includes new product planning, facility location, research and
development capital expenditure etc.
Distinguishing Differences:
• Medium/long range forecasts deal with more comprehensive issues and
support management decisions regarding planning and products, plants and
processes.

• Short-term forecasting usually employs different methodologies than

longer-term forecasting

• Short-term forecasts tend to be more accurate than longer-term forecasts.

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 Influence of Product Life Cycle
Introduction – Growth – Maturity – Decline
• Introduction and growth require longer forecasts than maturity and decline. As
product passes through life cycle, forecasts are useful in projecting the staffing
levels, Inventory levels and Factory capacity etc.
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position

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 Product Life Cycle
Introduction Growth Maturity Decline
1. Product design 1. Forecasting 1. Standardization 1. Little product
and development critical 2. Fewer product differentiation
critical 2. Product and changes, more 2. Cost
2. Frequent process reliability minor changes minimization
product and
OM Strategy/Issues

3. Competitive 3. Optimum 3. Overcapacity

process design product capacity in the industry
changes improvements and 4. Increasing 4. Prune line to
3. Short production options stability of process eliminate items
runs 4. Increase capacity not returning
5. Long production
4. High production 5. Shift toward runs good margin
costs product focus 5. Reduce
6. Product
5. Limited models 6. Enhance improvement and capacity
6. Attention to distribution cost cutting
quality

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 Types of Forecasts
1. Economic forecasts
► It addresses business cycle – inflation rate, money supply, housing
starts and other planning indicators.
2. Technological forecasts
► It Predicts rate of technological progress.
► It impacts development of new products.
3. Demand/ Sales forecasts
► It predicts the sales of existing products and services.
► Demand driven forecasts focus on rapidly identifying and tracking
customer desires.
► It drive a company’s production, capacity and scheduling systems
and serves as input to business functions like finance, marketing
and HRM(personal planning).

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 Strategic Importance of Forecasting
(Critical in all aspects of business)
1. Human Resources:
• Hiring, training, laying off workers all depends on anticipated demand.
• If the HRD must hire additional workers without warning, the amount of
training declines and the quality of the workforce suffers.
2. Capacity:
• Capacity shortages can result in undependable delivery, loss of customers,
loss of market share.
• When excess capacity exists, costs can skyrocket.

3. Supply Chain Management: –

• Good supplier relations - advantages in product innovation – cost reduction
and speed to market – finally satisfied customers.

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 Seven Steps in Forecasting
(Example :Disney world)
1. Determine the use of the forecast: It uses park attendance forecasts to
drive decisions about staffing, opening times, ride availability and food
supplies.
2. Select the items to be forecasted: For its six main parks, forecast of
daily attendance at each is the main number that determines labor,
maintenance and scheduling.
3. Determine the time horizon of the forecast: Disney develops daily,
weekly, monthly, annually and 5-year forecasts.
4. Select the forecasting model(s): It uses variety of statistical models
including moving averages, econometrics and regression. Also uses
judgmental techniques.
5. Gather the data needed to make the forecast: Its forecasting team
employs 35 analysist and 70 field personnel to survey 1million
people/business every year.
6. Make the forecast
7. Validate and implement results: models are reviewed at highest levels
to make sure the model, assumptions and data are valid.
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 Realities!
► Forecasts are seldom perfect, unpredictable outside
factors may impact the forecast

► Most techniques assume an underlying stability in the

system

► Product family and aggregated forecasts are more

accurate than individual product forecasts

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 Forecasting Approaches
Qualitative Methods
► It is used when situation is vague and little data exist: New products, New
technology.
► It Involves intuition, experience.
► e.g., forecasting sales on Internet
Quantitative Methods
► It is used when situation is ‘stable’ and historical data exist: Existing

products, Current technology.

► It involves mathematical techniques

► e.g., forecasting sales of LED televisions

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 Line Balancing Problem
Demand for the product is 120 units day and the manufacturing
system producing this product has 8 hrs work-day. The
processing time on the input material to convert the finished
product is 100 minutes. At present the production system has 26
stations are arranged in the line. The material flow in the
production line is always in forward direction. What is the cycle
time. The management of production system decided to increase
the production from current 120 units tp 160 units . What is the
minimum number of stations required to have the increased
production quantity

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 Overview of Qualitative Methods

1. Jury of executive opinion: Pool opinions of high-level experts,

sometimes augment by statistical models.

2. Delphi method: Panel of experts, queried iteratively.

3. Sales force composite: Estimates from individual salespersons are

reviewed for reasonableness, then aggregated.

4. Market Survey: Ask the customer

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Jury of Executive Opinion:
► In this, the opinion of small group of high-level experts and managers in
combination with statistical models are pooled to arrive at a group estimate
of demand. It is relatively quick.
► Eg. Bristiol-Myers Squibb Company, uses 220 well-known research scientists as its jury
of executive opinion to get a grasp on future trends in the world of medical research.

Sales Force Composite:

► Each salesperson projects sales in his region. These forecasts are reviewed
to ensure they are realistic. Then they are combined at district and national
levels to reach at overall forecasts.
► At Lexus, an automobile manufacturer, Its dealers meet every quarter to have a ‘make
meeting’ in which they talk about what is selling, in what colors, and with what options,
so the factory knows what to built.

Market Survey:
➢ It solicits inputs from customers or potential customers(questionnaires,
surveys are done to collect data and test hypothesis about consumer
behavior) regarding future purchasing plans.
➢ It helps not only in preparing a forecast but also in improving product
design and planning for new products.
➢ However, both sales fore composite and market survey suffer from overly
optimistic forecasts that arise from customer inputs. 19
Delphi Method:
► Three different types of participants: decision makers, staff personal, and

respondents.

► Decision makers usually consists of a group of 5 to 10 experts who will make

the actual forecast.

► Staff personnel assist decision makers by preparing, distributing, collecting,

and summarizing a series of questionnaires and survey results.

► The respondents are a group of people, often located in different places, whose
judgement are valued and they give inputs to decision maker before a forecast
is made.

► It is iterative group process, continues until consensus is reached.

► Eg. The state of Alaska has used the Delphi method to develop its long term economic
forecast. A large part of the state’s budget is derived from million plus barrels of oil pumped
daily through a pipeline at Prudhoe Bay. The large Delphi panel of experts had to represent
all groups and opinions in the state and all geographic areas.
 Delphi Method
Decision Makers
(Evaluate responses
and make decisions)
Staff
(Administering
survey)

Respondents
(People who can make
valuable judgments)
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