FORECASTING and SCHEDULING

MODULE 4 OUTLINE

LEARNING OBJECTIVES

After completing this module, you are expected to:

I. explain the importance of understanding forecast for managers;

II. discuss the relevance of operation planning in forecasting ;
III. explain the uses of forecasts in operation management
IV. explain the element of good forecasts:
V. discuss different approaches to forecasting and
VI. appreciate the value of understanding forecasting and scheduling

INPUT INFORMATION

Module 4 Forecasting and Scheduling

“
LEARNING ACTIVITIES

Individual Activity : Case Work (in 150 words only)

“Omar has heard from some of his customers that they will probably cut back on order sizes in the next quarter. The
company he works has been reducing its sales force due to falling demand and he worries that he could be next if his
sales begin to fall off. Believing that he may be able to convince his customer not to cut back on orders, he turns in an
optimistic forecasts of his next quarter sales to his manager. What are the pros and cons of doing that?”

ASSESSMENT/EVALUATION

I. Synchronous Test with time limit.

Long test link will be provided through our group chat. This is a synchronous test with a time limit.

II. Asynchronous Learning

See: Individual Activity Below

LEARNING RESOURCES
Book/E-book:
 Production and Operation Management 2012 Ed. Stevenson, Sum,Mc Graw Hill Companies
 Operation Management 2009 Ed. 10th Edition William J. Stevenson,Mc Graw Hill Companies
 Fundamental Marketing in the Philippine Setting,2nd Ed .Josiah Go, Chiqui Escaller-Go.Mansmith
 FORECASTING and SCHEDULING
MODULE 4 Proper

Forecasts are basic inputs for many kinds of decisions in business organization. It is important for all managers to be able to
understand and use forecasts. Although some forecasts are developed by the marketing function, the operation function is often
involved in forecast development. Operation is a major user of forecasts. This module provides important insights in forecasting as well
as information on how to develop and monitor forecasts. It describes the elements of good forecasts , the necessary steps in preparing
a forecast, basic forecasting techniques, and how to monitor a forecast.

1.0 FORECASTING
Planning is an integral parts of manager’s job.
If uncertainties cloud the planning horizons, managers will find it difficult to plan effectively.
Forecasts helps managers by reducing some uncertainty, thereby enabling them to develop meaningful plan
Forecast is statement about the future value of a variable of interest.

a. Forecast are the basic input in the decision processes of operation management because they provides information on future
demands. The importance of forecasting to operations management cannot be overstated.
The primary goal of operations management is to match the supply to demand. Having a forecast of demand is essential for
determining how much capacity or supply will be needed to meet the demand.
 Example: Operations need to know what capacity will needed to make staffing and equipment decisions: budgets
must be prepared, purchasing needs information for ordering from suppliers and supply chain partners need to make
the plan.
Two aspect of forecast are important
 expected level of demand- the expected level of demand can be a function lf some structural variations such as
trends or seasonal variations
 degree of accuracy that can be assigned to a forecasts- potential size of forecast. Forecast accuracy is a function of
the ability of forecasters to correctly model the demand, random variation, and sometimes unforeseen events.
b. Forecasts are made with reference to a specific time horizons. The time horizons may be fairly short (e.g. an hour, day, week
or month) , or somewhat longer (e.g. next six months, next year, next five years, or the lifespan of a product or service)
 Short term forecast pertains to ongoing operations.
 Long range forecasts can be an important strategic planning tools. Long term forecasts pertains to new products or
services, new equipment, new facilities, or something else that will require a somewhat long lead time to develop,
construct or otherwise implements.
c. Forecasts are the basis of budgeting, planning capacity, sales, production and inventory, personnel, purchasing and more.
Forecast plays an important role in the planning process because they enable managers to anticipate the future so they can
plan accordingly.
d. Forecasts affect decisions and activities throughout an organization, in accounting, finance, human resources, marketing ,
and Management information System (MIS) as well as in operations and other parts the organizations. Here are some
examples of uses of forecast in business organization.
1. Accounting, new products/ product and costs estimates, project projections, cash management
2. Finance-equipment/equipment replacement needs, timing and amount ,of funding/borrowing needs
3. Human resources-Hiring activities, including recruitment, interviewing, training, layoff planning, including replacement
counselling.
4. Marketing-pricing and promotions ,e-business strategies, global competition strategies.

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 5. MIS – new revised information system, internet services.
6. Operations-schedules , capacity planning, work assignments and workloads, inventory planning, make or buy
decisions, outsourcing, project management
7. Product and service designs- revisions of current features, designs of new products, or services.
Different department often have different perspective on forecast making a consensus forecast difficult to achieve.
Example:
Salespeople by their very nature , may be overly optimistic with their forecast, and may want to” reserve” their capacity with their
customer. This can results in excess costs for operations and inventory storage. Also if demands exceeds forecast, operations and
supply chain may not be able to meet demands , which would mean lost business and dissatisfied customers.

Forecast is also an important component of yield management, which relates to the percentage capacity being used. Accurate forecast
can helps managers plan tactics (e.g. offer discounts , don’t offer discounts) to match capacity with demands, thereby achieving high
yields level.

Uses of Forecast
1. Helps the manager plan the system
Planning the system generally involves long range plans about the types of product and services to offers, what facilities and
equipment to have, where to locate and so on.
2. Helps them plan the use of the system
Planning the use of the system refers to short range and intermediate range of planning which involves task such as planning
inventory and workforce level, planning purchasing and production, budgeting and scheduling.

The responsibility for preparing demands forecast in business organizations lies with marketing or sales rather an operations.
Operations generated forecasts often have to do with inventory requirements, resources needs, time requirements and the likes.

1.1 ELEMENTS OF GOOD FORECASTS- the forecasts should be:

1. Timely
 Certain amount of time is needed to responds to the information contained in a forecast
Example : Capacity cannot be expanded overnight, nor can inventory levels be change immediately hence
the forecasting horizon must cover the time necessary to implement possible change.
2. Accurate
 The degree of accuracy should be stated. This will enable users to plan for possible errors and will provide
a basis for comparing alternative forecast.
3. Reliable
 It should work consistently. A technique that sometimes provides good forecasts and sometimes a poor
one will leave users with the uneasy feeling that they may get burned every time a new forecast is issued.
4. Meaningful units
 Financial planners need to know how much will be need, planners need to know how many units will be
needed , and schedulers needs to know what machines and skills will be required. The choice of units
depends on users needs.
5. In writing
 Written forecasts will permits an objectives basis for evaluating the forecast once actual results are in
6. Simple to understand and use
 Users often lacks confidence in forecasts based on sophisticated techniques. Simple forecasting
techniques enjoys wide because users are more comfortable working with them. spread popularity
7. Cost effective
 The forecast should be cost effective. The benefit outweigh the costs.

1.2 STEPS IN THE FORECASTING PROCESS

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There are six basic steps in the forecasting process:

1. Determine the purpose of the forecast

 How will it be used and when it will be needed. This steps will provide] a indications of the level of detail
required in the forecast the amount of resources that can be justified and the level of accuracy required.
2. Establish a time horizon
 The forecast must indicates a time interval, keeping in mind that accuracy decreases as the horizon
increases..
3. Select a forecasting technique
4. Obtain , clean and analyze appropriate data
 Obtaining the data can involved significant effort. Once obtained , the data may need to be cleaned , to get
rid of outliers and obviously incorrect data before analysis
5. Make the forecast
6. Monitor the forecasts
o A forecast has to be monitored to determine whether it is performing in satisfactory manner. If it is not ,
reexamined the method , assumptions, validity of data and so on: modify as needed, and prepare a revised
forecast.

2.0 APPROACHES TO FORECASTING

There are general approaches in forecasting:

1. Qualitative method-consist mainly of subjective inputs , which openly defy precise numerical description.
 Qualitative technique permits inclusions of soft information (e.g human factors , personal opinions ) in the
forecasting process.
2. Quantitative methods-involve either the projection of historical data or the development of associates models that
attempts to utilize causal (explanatory variables) variables to make a forecast.
 Quantitative techniques consists mainly of analyzing objectives or hard a data. They personal avoid
personal biases that sometimes contaminates qualitative methods

The following are the forecasting technique:

1. Judgmental forecast-rely on analysis of subjective inputs obtained from various sources, such as consumer surveys ,the
sales staff, managers, executives, and panels of experts,
2. Time –Series forecast- simply attempts to project past experience in the future. This technique use historical data with the
assumption will like the past. Others attempt to extrapolate those patterns into the futures without trying to identify causes of
the patterns.
3. Associative models use equations that consist of one or more variables that can be used to predict demand. Example; the
demand for paint might be related to variables such as price per gallon and the amount spent on advertising , as well as the
specific characteristics of the paint (drying time , ease of clean up)

Other Forecasting Methods:

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 1. Focus Forecasting
 Some companies use forecasts based on a “best current performance “ basis It involves the use of several
forecasting methods (e.g. moving average, weighted average, and exponential smoothing). All being applied to the
last few months of historical data after any irregular data has been removed. The method that has been the highest
accuracy is then to use to make the forecast for the next month.
2. Techniques for trends
 Analysis of the trends involves developing an equation that suitably describe the trends (assuming the trends is
present in the data.

2.1 PRACTICAL PRINCIPLES OF FORECASTING

The following are set of principles to guide best practices in forecasting

1. Use quantitative rather than qualitative methods

2. Limit subjective of adjustment of quantitative forecasts
3. Adjust events expected in the future
4. Asks experts to justify their forecast in writing
5. Use structured procedures to integrates judgmental and quantitative methods
6. Combine forecasts from approached s that differ
7. If combining forecast , begin with equal weights
8. Compare fast performance of various forecasting ,methods
9. Seek feedback about forecast
10. Use multiples measure of forecast accuracy.

END OF MODULE 4: Forecasting ,and Scheduling

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College of Business and Accountancy Prepared by Reynaldo N. Salvador