0Demand forecastingDemand estimates for products and services are the starting point for all the other

planning in operations management. Management teams develop sales forecasts based in part on demand estimates. The sales forecasts become inputs to both business strategy and production resource forecasts. Demand forecasting means estimation for future demand by using past data. It is a process of estimating a future event by casting forward past data The past data are systematically combined in a predetermined way to obtain the estimate of future.

Significance of forecasting
Production planning Manpower planning Helpful in providing base to the economic planning Helpful in stock maintaining Helpful in increasing sales Helpful in financial control New Facility Planning It can take 5 years to design and build a new factory or design and implement a new production process. Production Planning Demand for products vary from month to month and it can take several months to change the capacities of production processes. Workforce Scheduling Demand for services (and the necessary staffing) can vary from hour to hour and employees weekly work schedules must be developed in advance.

Forecasting MethodsQualitative Approaches Opinion Poll Method Survey Method Opinion Poll methodDelphi method Quantitative Approaches Linear Regression Simple Moving Average Weighted Moving Average Exponential Smoothing (exponentially weighted moving average) Expert Opinion

Market Experiment

Exponential Smoothing with Trend (double exponential smoothing)

Survey MethodComplete Enumeration Sample survey Simple Linear Regression

Linear regression analysis establishes a relationship between a dependent variable and one or more independent variables. In simple linear regression analysis there is only one independent variable. If the data is a time series, the independent variable is the time period. The dependent variable is whatever we wish to forecast. Regression Equation This model is of the form: Y = a + bX Y = dependent variable X = independent variable a = y-axis intercept b = slope of regression line

Simple Moving Average

It is called moving because as new demand data becomes available, the oldest data is not used. By increasing the AP, the forecast is less responsive to fluctuations in demand By decreasing the AP, the forecast is more responsive to fluctuations in demand. Weighted Moving Average This is a variation on the simple moving average where the weights used to compute the average are not equal. This allows more recent demand data to have a greater effect on the moving average. The weights must add to 1.0 and generally decrease in value with the age of the data. The distribution of the weights determine the impulse response of the forecast.

Exponential Smoothing
The weights used to compute the forecast (moving average) are exponentially distributed. The forecast is the sum of the old forecast and a portion () of the forecast error (A t-1 - Ft-1). Ft = Ft-1+ (A t-1 - Ft-1) The smoothing constant, , must be between 0.0 and 1.0. A large provides a high impulse response forecast. A small provides a low impulse response forecast Example: Central Call Centre CCC wishes to forecast the number of incoming calls it receives in a day from the customers . CCC schedules the appropriate number of telephone operators based on projected call volumes. CCC believes that the most recent 12 days of call volumes are representative of the near future call volumes. Representative Historical Data Day 1 2 3 4 Calls 159 217 186 161

5
6 7 8 9 10

173
157 203 195 188 168

11
12

198
159

Moving Average Use the moving average method with an AP = 3 days to develop a forecast of the call volume in Day13.

F13 = (168 + 198 + 159)/3 = 175.0 calls Weighted Moving Average Use the weighted moving average method with an AP = 3 days and weights of .1 (for oldest datum), .3, and .6 to develop a forecast of the call volume in Day13. F13 = .1(168) + .3(198) + .6(159) = 171.6 calls Note: The WMA forecast is lower than the MA forecast because Day 13s relatively low call volume carries almost twice as much weight in the WMA (.60) as it does in the MA (.33).