Production and Operations Management: Demand Forecasting

PRODUCTION AND
OPERATIONS
MANAGEMENT
Chapter 3
DEMAND FORECASTING
Chapter 3
Demand Forecasting
Forecasting Defined : Forecasting is the first step

in planning. It is defined as estimating the future
demand for products and services and the resources
necessary to produce these outputs.
Production and Operations Management

Himalaya Publishing House By K. Aswathappa & K. Shridhara Bhat
Chapter 3
Demand Forecasting
Uses of Forecasts
Forecasts help managers plan the productive system and also
help them plan the use of the system. Planning the productive
system involves long-range plans regarding the type of
products and services to offer, what facilities and equipments
to have, where to locate and the like. Planning the use of the
system refers to short-range and intermediate range planning
involving tasks such as planning inventory and workforce
levels, planning purchasing and production, scheduling and
budgeting.

Chapter 3
Demand Forecasting
Demand forecasting is needed for:

• New facility Planning
• Production Planning
• Work force scheduling
• Financial planning

Chapter 3
Demand Forecasting
Forecasting Time Horizons
• Short-range forecast: Has a time span of upto

one year, but usually less than 3 months.
• Medium-range forecast: Has a time span from 3
months to 3 years.
• Long-range forecast: Has a time span of 3 years
or more.

Chapter 3
Demand Forecasting
Types of Forecasts
• Technological forecasts: Concerned with rates of

technological progress
• Economic forecasts: Statements of expected
future business conditions.
• Demand forecasts: Projections of demand for a
company's products or services throughout some
future period.

Chapter 3
Demand Forecasting
Objectives of Demand Forecasting

Short range objectives of demand forecasting:
i. Formulation of production strategy and policy
ii. Formulation of pricing policy
iii. Planning and control of sales
iv. Financial planning
• Medium or Long-Range Objectives:
i. Long-range planning for production capacity
ii. Labour requirements (Employment levels)
iii. Restructuring the capital structure

Chapter 3
Demand Forecasting
Steps in the Forecasting Process

 The seven basic steps
i. Determine the purpose (objectives) of the forecast
ii. Select the items for which forecasts are needed
iii. Determine the time horizon for the forecast
iv. Select the forecasting model (method or technique)
v. Gather and analyse the data needed for the forecast
vi. Prepare the forecast
vii. Monitor the forecast

Chapter 3
Demand Forecasting
 Forecasting Approaches : The two general

approaches to forecasting are : (i) Qualitative and
(ii) Quantitative. Qualitative methods consist
mainly of subjective inputs, often of non-
numerical description. Quantitative methods
involve either projection of historical data or the
development of association models which attempt
to use causal variables to arrive at the forecasts.

Chapter 3
Demand Forecasting
Overview of Qualitative Methods

1. Jury of executive opinion method involves taking
opinion of a small group of high-level managers and
results in a group estimate of demand.
2. Salesforce composite method is based on estimate of
expected sales by sales persons.
3. Market research method or consumer survey method
determines consumer interest in a product or service
by means of a consumer survey.
4. Delphi method is a judgemental method which uses a
group process that allows experts to make forecasts.

Market Research Chapter 3
Demand Forecasting
• Advantages –
• Consumer’s opinion regarding their future
purchasing plans are better than executive
opinion
• Information that might not be available
elsewhere can be obtained

Chapter 3
• Disadvantages – Demand Forecasting
• It may not be possible to contact every customer

or potential customer and opinions obtained –
forecast error
• Surveys require considerable amount of
knowledge & skill to handle correctly
• Surveys can be expensive & time consuming
• The response rate for mailed questionnaire may
be poor
• The survey results may not reflect the opinions
of the market Production and Operations Management
Delphi Method Chapter 3
Demand Forecasting
• Advantages –
• This method can be used to develop long
– range forecast of product demand and
sales projections for new products
• A panel of experts may be used as
participants.

Chapter 3
Demand Forecasting
• Disadvantages –
• The process can take long time.
• Responses may be less meaningful
because respondents are not
accountable due to anonymity
• High accuracy may not be possible
• Poorly designed questionnaire will result
in ambiguous or false conclusions

Chapter 3
Demand Forecasting
Overview of Quantitative Methods
• Time series models use a series of past data to

make a forecast for the future.
• Time series is a time-ordered sequence of
observations taken at regular intervals over a
period of time.

Chapter 3
Demand Forecasting
Time Series Models
• Naïve approach
• Moving Averages Method
• Exponential Smoothing Method

Chapter 3
Demand Forecasting
Causal Models
• Trend Projection
• Linear Regression Analysis

Time Series Forecasting Chapter 3
Methods Demand Forecasting
• Decomposition of a Time Series –

• Trend – it refers to gradual, long term,
upward or downward movement in the data
over time. Changes in income, population,
age distribution or cultural views may
account for such movements
• Seasonality – It refers to short-term, fairly
regular variations related to factors such as
weather, holidays, vacation etc. seasonal
variations can be daily, weekly or monthly
Chapter 3
Demand Forecasting
• Cycles – are wavelike variations of more

than one year’s duration or which occur
every several years. They are usually
tied with business cycle related to a
variety of economic, political or
agricultural conditions
• Random variations – are residual
variations which are blips in the data
caused by chance and unusual situations
which can not be predicted (e.g. war,
earthquake, flood etc.)
Chapter 3
Demand Forecasting
• Naïve Approach: The simplest way to forecast is
to assume that forecast of demand in the next
period is equal to the actual demand in the most
recent period (i.e. current period).
• Moving Averages Method – A moving average
forecast uses a number of most recent historical
actual data values to generate a forecast.
• Moving average = ∑demand in previous n
periods / n
• It removes the effect of random fluctuation. It is
most useful when demand has no pronounced
trend or seasonal fluctuations.
Chapter 3
Demand Forecasting
• In the weighted moving average method each
historical demand in the moving average can have
its own weight and the sum of the weight equals
one.
• For example, in a 3 period weighted moving
average model, the most recent period might be
assigned a weight of 0.50, the second most recent
period might be assigned a weight of 0.30 and the
third most recent period with a weight of 0.20
• Then forecast, Ft+1=(0.50Dt +0.30Dt-1 +0.20Dt-2)/
Sum of the weights (i.e. 0.5+0.3+0.2)
Exponential Smoothing Chapter 3
Method Demand Forecasting
• It is a sophisticated weighted moving average

method. It requires only three items of data:
this period’s forecast, the actual demand for
this period and  which is referred to as
smoothing constant and having a value
between 0 and 1. the formula used is
• Ft = Ft-1 + (At-1 – Ft-1)
• Selecting a smoothing constant is basically

a matter of judgment or trial and error.
Selection of a Fore-casting Chapter 3
Method Demand Forecasting
• Factors to be considered –
• Cost & Accuracy
• Data Available
• Time Span
• Nature of Products & Services
• Impulse Response & Noise Dampening

Example Chapter 3
Demand Forecasting
• The table below shows the monthly demand over 6

months period for a product.
• (a) Determine the forecast of demand for the 7th month
using 3 month simple moving average method.
• (b) if the weightage given for the demand for 6th, 5th and
4th months are 0.5, 0.3 and 0.2 respectively, determine
the forecast of demand for the 7th month using weighted
moving average method.
Month 1 2 3 4 5 6
Demand (units) 120 130 110 140 110 130

Chapter 3
Demand Forecasting
• ABC company predicted the sales for a

product as 150 units for February 2003.
Actual demand for February 2003 was
158 units. Using a smoothing constant
() of 0.3, forecast the demand for March
2003.

Chapter 3
Demand Forecasting
1. Identify and clearly state the objectives of forecasting.
2. Select appropriate method of forecasting.
3. Identify the variables.
4. Gather relevant data.
5. Determine the most probable relationship.
6. For forecasting the company’s share in the demand,
two different assumptions may be made:
(a) Ratio of company sales to the total industry sales will
continue as in the past.
(b) On the basis of an analysis of likely competition and
industry trends, the company may assume a market
share different from that of the past. (alternative /
rolling forecasts) Production and Operations Management
Chapter 3
Demand Forecasting
7. Forecasts may be made either in terms of

units or sales in rupees.
8. May be made in terms of product groups and
then broken for individual products.
9. May be made on annual basis and then
divided month-wise, etc.


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PRODUCTION AND

Forecasting Defined : Forecasting is the first step

Production and Operations Management

Production and Operations Management

Demand forecasting is needed for:

Production and Operations Management

Forecasting Time Horizons

• Short-range forecast: Has a time span of upto

Production and Operations Management

• Technological forecasts: Concerned with rates of

Production and Operations Management

Objectives of Demand Forecasting

Production and Operations Management

Steps in the Forecasting Process

Production and Operations Management

 Forecasting Approaches : The two general

Production and Operations Management

Overview of Qualitative Methods

Production and Operations Management

Production and Operations Management

• It may not be possible to contact every customer

Production and Operations Management

Production and Operations Management

Overview of Quantitative Methods

• Time series models use a series of past data to

Production and Operations Management

Time Series Models

Production and Operations Management

Production and Operations Management

Methods Demand Forecasting

• Decomposition of a Time Series –

• Cycles – are wavelike variations of more

Method Demand Forecasting

• It is a sophisticated weighted moving average

• Selecting a smoothing constant is basically

Method Demand Forecasting

Production and Operations Management

• The table below shows the monthly demand over 6

Production and Operations Management

• ABC company predicted the sales for a

Production and Operations Management

7. Forecasts may be made either in terms of

Production and Operations Management

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