Forecasting

in Operations Management

Prepared by:

MARK LEE P. NIBREDA, LPT, MBM(OCC)

 OBJECTIVES
• Define Forecasting

• Differentiate Qualitative versus Quantitative Forecasting.

• Explain Qualitative Forecasting

• Calculate Quantitative forecasting such as Naïve Approach, Averaging Approach, Exponential

Smoothing, Trend Projection, and Simple Linear Regression

 WHAT IS FORECASTING?
• It is a technique that uses historical data as inputs to make informed

estimates that are predictive in determining the direction of future trends.

• A business forecast allows us to plan production, distribution, and

resources.

Types of forecast
Economic Technological Demand
forecasts forecasts forecasts
variety of economic indicators,
rates of technological progress future demand for a company’s
like money supply, inflation
and innovation products or services.
rates, interest rates, etc.
 Importance of Forecasting
• Production needs forecasts to plan production levels,
workforce, material requirements, inventories, etc.
• The production forecast flows through the central nervous
system of an organization and helps to identify
opportunities and decide on the best way forward. Demand
forecasting allows businesses to optimize inventory by
predicting future sales. By analyzing historical sales data,
demand managers can make informed business decisions
about everything from inventory planning and warehousing
needs to running flash sales and meeting customer
expectations.
Time Frames for
Forecasting

Short-term Medium-term Long-term

forecasts forecasts forecasts
Immediate job Plans for inventory, Strategic product
assignments, shipping, warehousing, and raw planning with potential
and purchasing material supplies. capital investments.
 Steps in Identify the
Forecasting Collect
Problem

Process Information Perform a

Preliminary
Choose the
Analysis
Forecasting
Model
Data Analysis
Verify Model
Performance
FORECASTING APPROACHES
 QUALITATIVE
FORECASTING
 WHAT IS Qualitative
FORECASTING?
• Use the opinions and intuition of a group of experts.
• Method of making predictions about a company's
finances that uses judgement from experts. Expert
employees perform qualitative forecasting by
identifying and analyzing the relationship between
existing knowledge of past operations.
QUALITATIVE FORECASTING
TECHNIQUES

Executive Judgment

Sales Force Composite

Market Research/ Survey

Delphi Method
Executive Judgment
• The subjective views of executives or experts from
sales, production, finance, purchasing, and
administration are averaged to generate a forecast
about future sales.

Sales Force Composite

• Some companies use as a forecast source salespeople who
have continual contact with customers. They believe that the
salespeople who are closest to the ultimate customers may have
significant insights regarding the state of the future market.
Market Research/Survey
• Some companies conduct their own market surveys
regarding specific consumer purchases. Surveys may
consist of telephone contacts, personal interviews, or
questionnaires as a means of obtaining data.

Delphi Method
• This is a group technique in which a panel of experts is
questioned individually about their perceptions of future
events. The forecasts and accompanying arguments are
summarized by an outside party and returned to the experts
along with further questions.
 Quantitative
FORECASTING
 WHAT IS Quantitative
FORECASTING?
• a numerical process, making it consistent and
aim-oriented.
• it exclude expert opinions and utilize statistical
data based on quantitative information.
QUANTITATIVE FORECASTING
TECHNIQUES

Naïve Approach

Averaging Approach Time-series models

Exponential Smoothing

Trend Projection

Linear Regression Associative model

 Naïve Approach
A forecast for any period that uses a previous period’s actual
value without adjusting them or attempting to establish causal
factors.

3 TYPES OF NAÏVE APPROACH:

• Stable Series
Variation around an average & the last data point becomes the forecast for the
next period.
• Seasonal Variations
The forecast of this “Season” is equal to the value of series of the last season.
• Trend
The forecast is equal to the last value of the series plus or minus the difference
between the last two values of the series.
 sample problem
The following data shows the daily sales in dozen for each of the three products of a
commercial bakery. Determine the forecast for the 12th day using Naive Approach:
solution Looking at the data for cookies, we can see that the
values are relatively close; so we can assume that
the series is STABLE.

F12= 17 dozens of cookies is projected on the 12th

day.

Data for muffin, the values are similar with cookies

but there is a distinction of the last four values are
increasing, so we can assume that this is TREND.

F12= 23+(23-22).

F12= 24 dozens of muffins is projected to be sold

Look at the data for cakes, the values show "peak:

behavior every four days. We can assume that the
series is SEASONAL.

F12= 28 dozens of cakes is projected on the 12th

day.
 Averaging Approach
WEIGHTED MOVING
MOVING AVERAGE
AVERAGE
•A technique that averages a number of the most recent actual data •Similar to a moving average, except that it
values in generating a forecast. assigns more weight to the most recent values in
•As each new actual value becomes available, the forecast is updated a time series.
by adding the newest value and dropping the oldest, then re-computing
the average. •Weight is used to place more emphasis in recent
•It “moves” by reflecting only the most recent values. values, this makes the technique more
responsive to changes.
 sample problem- MOVING AVERAGE
ABC company have recorded the following demands of cars for periods 1 to 5. The
company wants to compute a three-period forecast for period 6 given the following
demand for cars for the last five periods:
solution

6
 sample problem- WEIGHTED MOVING AVERAGE
ABC company have recorded the following demands of cars for periods 1 to 5. The
company wants to compute a three-period forecast for period 6 given the following
demand for cars for the last five periods with an assigned weight of .20, .30, and .50.
 solution

WMAF6 = 65(.20) + 90(.30) + 85(.50)

1
WMAF6 = 13 + 27 + 42.50
1
WMAF6 = 82.50/1
WMAF6 = 82.50 or 83 cars

The forecast for period 6 is 83 cars.

 Exponential Smoothing
• Forecast future values using a weighted average of all previous values in
the series.
• Usually used to make short term forecasts, as longer term forecast using
this technique can be quite unreliable.
 sample problem
Consider the problem of Anne, the marketing manager of ABC Company. Suppose she
plans to use the exponential smoothing method to forecast the monthly sales for 7
months because she wants to include the past forecast and the new forecast having the
smoothing parameter of α = 0.80. What is the forecast of monthly sales?

Period (month this

sales
year)
 solution
Period
(month this sales
year)
 Trend PROJECTION
• A time-series forecasting method that fits a trend line to a series of historical
data points and then projects the line into the future for forecasts.
• It is used to predict future data by relying on historical data.
• Trend equation is used to determine the trend in the variable y, which can be
used to forecasting.
• Linear equation describes the process when the economic increases or decreases
by more or less constant value.

Trend projection formula:

yt=a+bt
Where:
• Y = computed value of the variable to be predicted (called the dependent variable)
• a and b = are linear coefficients.
• t = is the independent variable ( time - years, quarters, months or weeks)
 Trend PROJECTION
• The coefficients of the equation, a and b , can be determined using
these equations:
 sample problem
Time series data of cell phone unit sales of ABC Company for 10 months are given
below. Calculate the demand forecast for the month of May of 2021 using trend
forecasting.
MONTHS t unit sales
 solution
t(weight) y(unit sales) t*y t^2

1
 solution
t(weight) y(unit sales) t*y t^2

1
 solution
months t Unit sales Problem:
Time series data of cell phone unit sales of
ABC Company for 10 months are given below.
Calculate the demand forecast for the month
of May of 2021 using trend forecasting.

Ymay 2021= a + bt

Ymay 2021= 699.40 + 7.51

(11)

Ymay 2021= 699.40 + 82.61

Ymay 2021= 782.01 or 782

 QUIZ
Time series data of Laptop unit sales of XYZ Company for 8 months are given below.
Calculate the demand forecast for the month of June of 2022 using trend projection
forecasting.

MONTH t SALES (y) ty t²

October 2021 1 1,010.00
November 2021 2 1,205.00
December 2021 3 1,350.00
January 2022 4 998.00
February 2022 5 1,120.00
March 2022 6 905.00
April 2022 7 1,220.00
May 2022 8 1,125.00
June 2022 9 ?
 Simple Linear Regression
• Simplest and most widely used form of regression involves a
linear relationship between two variables.
• The objective in linear regression is to obtain an equation of a
straight line that minimizes the sum of equation vertical
deviations of points around the line.
Simple Linear Regression formula:
Yt = a + bx
Where:
• Yt = Predicted (dependent) variable
• x = Predictor (independent) variable
• b = Slope of the line
• a = value of Yt when X = 0, y-axis intercept
Simple Linear Regression
 sample problem
ABC Company 10 period data for its mobile phone store performance. Sales figures and profits
for the stores are given in the following table. Obtain a regression line for the data, and predict
profits for a store assuming an Income of 30,000 pesos.

Sales, x(in thousand pesos) Profits y( in thousand pesos)

sample problem
solution
solution

-
solution

Yt = -3.67 + .78 (30)

Yt= -3.67 + 23.4
Yt= 19.73 or 19,730

The Predicted Profits for 30,000 pesos

Income is Php 19,730.
 Quiz – simple linear regression
ZYX Company 7 period data for its mobile phone store performance. Sales figures and profits
for the stores are given in the following table. Obtain a regression line for the data, and predict
profits for a store assuming an Income of 25,800 pesos.

SALES (X) PROFITS (y) xy X²

14,750.00 7,800.00
14,500.00 7,600.00
17,700.00 9,550.00
16,500.00 8,050.00
15,900.00 8,400.00
14,200.00 7,100.00
18,600.00 10,780.00
"The key to making a
good forecast is not in
limiting yourself to
quantitative
information."
-NATE
SILVER
 References
• https://www.investopedia.com/terms/f/forecasting.asp
• https://blog.flexis.com/the-benefits-of-forecasting-in-planning-and-production
• https://yourbusiness.azcentral.com/disadvantages-market-research-new-product-
development-20911.html
• https://www.investopedia.com/terms/e/economicorderquantity.asp
Thank you for
listening!