MAN3504 EXAM 2 STUDY GUIDE CHAPTER 12 FORCASTING A forecast is a prediction of what will occur in the future A forecast of product demand is the basis for most important planning decisions regarding scheduling inventory production facility layout and design workforce distribution purchasing are functions of customer demand Long range strategic plans by top management are based on forecasts Forecasting is an uncertain process Costumers have more product choices and information and demand and receive grater product diversity made possible by rapid technological advances which make forecasting difficult Uses of Forecasting Capacity Planning Workforce Planning Inventory Planning Purchasing Storing Production Planning Financial Planning The strategic role of forecasting in Supply Chain Management Supply chain encompasses all of the facilities functions and activities involved in producing a product of service from supplies to customers All supply chain function s are affected by short term product demand and long run by new products and process technology changes and changing markets Accurate forecasting determines how much inventory a company must keep at various points along its supply chain Without accurate forecasts large stocks of costly inventory must be kept at each stage of the supply chain to compensate for the uncertainty of customer demand Because forecasting is not completely accurate all of the supply chain process need to be flexible to response to some degree of uncertainty The bullwhip effect is caused when slight demand variability is magnified as information moves back upstream in the supply chain o It is created when supply chain members make ordering decision with an eye to their own self interest and or they do not have accurate demand forecast from adjacent supply chain members Continuous replenishment Continuous updating of data is shared between suppliers and customers Customers are continuously being replenished daily or even more often by their suppliers based on actual sales Typically managed by the supplier reduces inventory for the company and speeds customer delivery Variations include just in time Vendor managed inventory and stockless inventory Rely heavily of accurate forecasts The forecast must be able to respond to sudden quick changes in demand The Effect of Inaccurate Forecasting Quantitative forecasting methods are also available to aid management in making planning decisions based on mathematical formulas time series analysis and regression Forecasting Methods Time series statistical techniques that use historical demand data to predict future demand We ll concentrate on this set of methods Regression methods attempt to develop a mathematical relationship between demand and factors that cause its behavior use management judgment expertise and opinion to predict future demand Qualitative Qualitative Methods Forecasts based on judgment expertise and opinion rather than past sales data the jury of execution option The most common type of forecasting method for the long term strategic planning process Top managers are the key group involved in the development of forecast for strategic plans Management marketing and purchasing and engineering are sources for internal qualitative forecasts One example Delphi method is a procedure for acquiring informed judgments and opinions from knowledgeable individuals using a series of questionnaires to develop a consensus forecast about what will occur in the future involves soliciting forecasts about technological advances from experts developed at the Rand Corporation shortly after World War 2 to forecast the impact of hypothetical nuclear attack on the US especially useful for forecasting technological change and advances Technological forecasting has become increasingly crucial to compete in the modern international business environment Quality Management Forecasting customer demand is key to providing good quality service Ann inaccurate forecast causes service to break down resulting in poor quality Strategic Planning There can be no strategic planning without forecasting Successful strategic planning requires forecasts of future products and markets The type of forecasting method depends on time frame demand behavior and causes of behavior Types of Forecasting Methods Choice of method depends on time frame demand behavior causes of behavior Time Frame Indicates how far into the future is forecast Short to mid range forecast typically encompasses the immediate future daily up to two years daily weekly or monthly sales demand for up to approximately two years into the future depending on the industry Primarily used to determine production and delivery schedules and to establish inventory level usually encompasses a period of time longer than two years normally used for strategic planning to establish long term goals These classification are generalizations the line between short and long range forecast is not always distinct The length of the forecast depends on how rapidly the product market changes Long range forecast We ll concentrate on short to mid range Demand Behavior Trend a gradual long term up or down movement of demand often starting points for developing forecast movements in demand that do not follow a pattern Random variations unpredictable Cycle an up and down repetitive movement in demand over a lengthy time span EX demand for winter sports equipment increases every four years before and after the Winter Olympics Seasonal pattern an up and down repetitive movement in demand occurring periodically often weather related Could occur on weekly basis for restaurants busy during lunch and malls busy during the weekends Irregular movements instances when demand behavior exhibits no pattern ex local floor might cause a momentary increase in carpet demand Forms of Forecast Movement Forecasting Process Forecasting is a continuous process that requires constant monitoring and adjustment Statistical techniques that make use of historical data accumulated over a period of time Assume that what has occurred in the past will continue to occur in the future Time Series Methods Relate the forecast to only one factor time Includes moving average exponential smoothing linear trend line Moving Average Naive forecast among the most popular methods for short range forecasting among service and manufacturing companies relatively easy to understand and use most popular moving average and exponential smoothing demand