• Forecasting demand is like forecasting weather .Sometimes the forecast or prediction fails completely and sometimes its near the predicted value but still not the exact value. Often scientists call forecasting as an educated guess, but even then forecasting helps us to plan our trips and journeys and most importantly we as farmers make use of forecasting to plant, harvest and take precautionary measures.
  • Forecasting in business forms the basis for budgeting and planning for capacity, sales, production, inventory, manpower, purchasing and more.
  • Forecasting allows the manager to anticipate the future so then can plan accordingly. Introduction
  • There are two major uses for forecasts. One is to help the Operations Manager plan the system and the other one is to help him plan the use of the system. These are important concepts different distinct but at the same time closely lined.

Planning the system refers to planning long term plans about the type of products or services to offer, what facilities and equipment to have, where to locate and so on and so forth. Planning the use of the system relates to short range and intermediate range planning which means planning inventory workforce resources, planning of purchasing and production activities, budgeting and scheduling etc.

production and operations management  FORECASTING Introduction

Thus it can be said that planning the systems more of a job of a senior manager, birds eye view and has ORGANIZATIONAL STRATEGY in it where as planning the use of the system is an OPERATIONAL STRATEGY

Business Forecasting is more than just predicting demand. Forecasting is also used to predict profits, revenues, costs, productivity changes, prices and availability of energy and raw materials, interest rates, movements of key economic indicators (GNP, inflation and government loans) and prices of stocks and bonds.

Forecasting is not an exact science. Even with the availability of computers, and algorithms, its unable to make an exact prediction it requires Experience, Managerial Judgment and Technical expertise. General Responsibility lies with the Marketing workforce but to this day not a single marketing forecast has been created without the valuable contribution of the Operations side.


A statement about the future value of a variable of interest such as resource requirements, capacity planning, SCM and product or service demand.

Forecasts affect decisions and activities throughout an organization

1.  Accounting, finance

2.  Human resources

3.  Marketing

4.  MIS

5.  Operations

6.  Product / service design
Applications of Forecasts

Accounting Cost/profit estimates
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services

Demand Management

Demand Management

production and operations management  FORECASTING Introduction

Independent Demand: What a firm can do to manage it?

1.  Either be Active or Passive meaning?

2.  Can take an active role to influence demand

3.  Can take a passive role and simply respond to demand

Components of Demand

  • Average demand for a period of time
  • Trend
  • Seasonal element
  • Cyclical elements
  • Random variation
  • Autocorrelation

Finding Components of Demand

Web-Based Forecasting: CPFR Defined

•Collaborative Planning, Forecasting, and Replenishment (CPFR) a Web-based tool used to coordinate demand forecasting, production and purchase planning, and inventory replenishment between supply chain trading partners. You will learn about this in your later part of the semester.

  • Used to integrate the multi-tier or n-Tier supply chain, including manufacturers, distributors and retailers.
  • CPFR’s objective is to exchange selected internal information to provide for a reliable, longer term future views of demand in the supply chain.
  • CPFR uses a cyclic and iterative approach to derive consensus forecasts.

Web-Based Forecasting:

Steps in CPFR

1.  Creation of a front-end partnership agreement

2.  Joint business planning

3.  Development of demand forecasts

4.  Sharing forecasts

5.  Inventory replenishment

  • Assumes causal system( That same system that existed in the past will exist in future, where as in reality unplanned events happen like tax rate increase, introduction of a competitors product or service or natural disasters)
  • Forecasts rarely perfect because of RANDOMNESS (having no specific pattern). Allowances should be made for inaccuracies.
  • Forecasts more accurate for groups vs. individuals naturally because forecasting errors in a group tend to cancel out forecasting errors for individuals.
  • Forecast accuracy decreases as time horizon increases indicating it is safe to make short range forecasts instead of long term forecasts. If you can recall we had talked about Flexible and Agile Corporations in the past.
  • Discuss the requirements of a good forecast.
  • Steps in making a forecast.
  • Fundamental types of forecast.
  • Finer classification of forecast
  • Discuss characteristics of Judgmental Forecasts.
  • Delphi Method.
  • Time Series Analysis.
  • Naïve Forecast.
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