IE-Industrial Management

&
Engineering Economy
Chapter-2
Forecasting
Dr.Srikanth.K
College Of Engineering & Technology
Department of Mechanical Engineering
Mizan – Tepi University
 Chapter-II
Topics covered
1.Forecasting-Introduction & Definition
2.Difference between Forecasting & Predection
3.Need for forecasting
4.Importance of Forecasting
5.Areas of Forecasting
6.Classification of Forecasting
7.Forecasting Models
8.Advantages ,Dis advantages and Applications of Forecasting
 Forecasting-Introduction
 Forecasting is the technique of estimating the relevant
future events and problems on the basis of past and
present behavior or happenings. It is backbone of any
business
 It involves detailed analysis of the past and present events
to get a clear cut idea about probable events in the future.
Meaning of Forecasting
 It is a systematic guessing of the future course of events
with the help of analysis of past and present events. It
provides basis for a planning..
 Forecasting-Definition
 Neter and Wasserman state

“ B u s i n e s s fo re c a s t i n g re fe rs t o t h e

statistical analysis of the past and current

movement in the given time series so as to

obtain clues about the future pattern of

those movements”
 Importance of Forecasting
• The need and importance
o f fo r e c a s t i n g c a n b e
found out with the help of
key role played for
forecasting in the
management process
especially in planning
process.
Areas of Forecasting
 Classification of Forecast
Long-term and Short-Term Forecasts
• Depending upon the period for which the forecast is made. It is
classified as long-term forecasting and short-term forecasting .

Forecast which cover the periods over one

year(5 years or 10 years) is termed as long-term
long-term forecasting
forecasting .
Long-term purpose sales, capacity planning and
investment planning
forecasting

Forecast which cover the periods less than one

short-term forecasting year is termed as short-term forecasting .
Shot-term purpose of materials control, loading
and scheduling and budgeting.
 LONG-TERM AND SHORT-TERM FORECASTS
Depending upon the period for which the forecast is made, it
is classified as long-term forecasting and short-term
forecasting. Forecasts which cover the periods less than one
year is termed as short-term forecasting, and which cover the
period over one year (5 years or 10 years) future are termed
as long-term forecasts.
Short-term forecasts are made for the purpose of materials
control, loading and scheduling and budgeting. Long-term
forecasts are madefor the purposes of product diversification,
sales and advertising budgets, capacity planning and
investment planning.
 Forecasting Models
• The forecasting techniques can be classified are :

Forecasting Models

1.Qualitative Techniques 2.Quantitative Techniques

This techniques are useful where no data This techniques are based on historical data.
is available and are useful for new These are more accurate and computers can
products. be used to speed up the process.
 Forecasting Models

Forecasting Models

1.Qualitative Techniques 2.Quantitative Techniques

1. Least square method (Regression Analysis)

1. Delphi type method
2. Moving Average method
2. Market surveys
3. Weighted Moving Average method
4. Exponential smoothening method
 1.Qualitative Techniques
I.Delphi Technique:
To make the judgemental forecasts more realistic by minimising bias, this method is
used.
In this method, a panel of experts are asked sequential questions in which the response
to one questionnaire is used to produce next questionnaire. The information available to
some experts are made available to the other experts. This technique is an iterative
process.
The Delphi method is a qualitative forecasting method in which opinions are collected
from experts to arrive at a reliable consensus. A series of questionnaire is sent to a
panel composed of experts from selected technical fields. Each questionnaire demands a
written opinion about specific subjects and reasons for justifying the opinions.
These reasons are summarised in each iteration and returned for inspection by the
whole panel. Through this series of exchanged view, the consensus is reached. This
method can be extended to several decades into future.
II. Market Research
This method can be used for new products or existing
products.
Usually the work is assigned to external marketing agencies.
This is recommended if extensive data is needed.
The purpose of the research is to gather information regarding
the nature of consumption.
The details about various factors which influence the demand
like location, buyer occupation, prices quantity, quality,
consumer income, etc., are collected and the factors are
related to get the forecast.
 2.Quantitative Techniques
I.LEAST SQUARE METHOD OF FORECASTING (Regression Analysis)
This is the mathematical method of obtaining "the line of best fit
between the dependent variable (usually demand) and an
independent variable.
This method is called least square method as the sum of the square of
the deviations of the various points from the line of best fit is
minimum or least. It gives the equation of the line for which the sum
of the squares of vertical distances between the actual values and the
line values are at minimum".
In a simple regression analysis, the relationship between the
dependent variable y and some independent variable x can be
represented by a straight line.
 II. MOVING AVERAGE (MA) FORECASTING
The past data of sales of a company can have fluctuations (high or low)
because of the seasonal variations and random variations.
Simple averaging of demand for previous periods is going to hide the trend and
it is meaningless since trend is an important factor. Moving Average (MA)
consists of series of arithmetic means calculated from overlapping groups of
successive elements of time series.
Moving average is a simple statistical method to extrapolate (Calculate) and
establish trend of past sales. This method uses a past data and calculates a
rolling average for a constant period. At each period, fresh average is computed
at the end of each period by adding the demand of the most recent period and
deleting the data of the old-period since the data in this method changes from
period to period, it is called moving average method.
A simple moving average is calculated as follows:
 III.Weighted Moving Average (WMA)
Sometimes the forecaster wants to use a moving average but does
not want all then periods equally weighted as in simple MA method.
But some organisations base their forecasts on a weighted moving
average.
In simple MA, equal weightage is given to 1st month, 2nd month and
3rd month in a three month moving average. But the organisation
wants to attach more weightage to the third month.and least to the
first month.
For example, depending upon the importance it assigns weightages,
e.g., 0.2 to 1st period, 0.3 to second and 0.5 to the third. The sum of
these weights should be equal to one.
 IV. EXPONENTIAL SMOOTHING METHOD
One of the disadvantages of the moving average forecasting is the
laborious operation of maintaining the data for all the previous years.
Exponential smoothing method requires only the current demand
and the forecasted demand for the current month. Simple moving
average method gives the equal weightage to the all the periods.
Exponential smoothing is distinguished by the fact that it assigns
weight to all the previous data and the pattern of weights assigned
are of exponential form.
Demand for the most recent data is given more weightage and the
weights assigned to older periods decrease exponentially. Thus
exponential forecasting ensure that the forecast made by this method
keeps pace with changing business trend.
 Selection of a Forecasting Technique
 The selection of a forecasting technique depends on the following
three factors:

• The time horizon

The characteristic of the decisions making • Level of details
1
situation which include • Numbers of items

• Cost
2
The characteristic of the • Accuracy
forecasting methods • Type of model

§ The item that is being

3 Present situations forecast
§ Amount of historical data
available
 Advantages of Forecasting
• Effective handling of uncertainty
• Better labor relations
• Balanced work-load
• Minimization in the fluctuations of production
• Better use of production facilities
• Better material management
• Better customer service
• Better utilization of capital and resources
• Better design of facilities and production system.
 Limitation of Forecasting
• Forecasting is to be made on the basis of certain assumptions and
human judgments. Faulty assumptions and human judgments will
yield wrong results.
• Too much of expectation will cause disappointment and impair the
initiative of the executives.
• It requires high degree of skill and the process must be undertaken
by specialists. This is difficult in practice.
• Proper forecasting needs adequate reliable information and it is very
difficult to collect reliable information. Hence, correct forecast is
impossible.
• There is no certainty of occurrence of future events predicted by
forecasting.
 Applications of Forecasting
1. Supply Chain Management
2. Econimic Forecating
3. Transportation Forecating
4. Product Forecating
5. Sales Forecating
6. Technology Forecating
7. Political Forecating etc.