CHAPTER 4

FORECASTING
DEMAND

CHAPTER OUTLINE:
1. What is Forecasting?
2. The Strategic Importance
of Forecasting
3. Seven Steps in the
Forecasting System
4. Forecasting Approaches
5. Time-Series Forecasting

CHAPTER OUTLINE:
6. Associative Forecasting
Methods:
a.Regression Analysis
b.Correlation Analysis
7. Monitoring and Controlling
Forecasts
8. Forecasting in the Service
Sector

WHAT IS
FORECASTING?

It is the art and science of

predicting future events. It
may include taking:
Historical data
Mathematical data

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FORECASTING TIME
HORIZONS
1. SHORT-RANGE FORECAST this forecast has a time span of
up to 1 year but is generally
less than 3 months. It is used
for:

planning purchasing
job scheduling
workforce levels
job assignments
production levels

FORECASTING TIME
HORIZONS
2. MEDIUM-RANGE FORECAST
- it generally spans from 3
months to 3 years. It is useful
in:
sales planning
production planning and
budgeting
analysis of various operating
plans

FORECASTING TIME
HORIZONS
3. LONG-RANGE FORECAST - It
generally spans for 3 years or
more. It is used in:

planning for new products

capital expenditures
facility location or expansion
research and development

TYPES OF
FORECASTS

1.ECONOMIC FORECASTS address the business cycle

by predicting inflation
rates, money supplies,
housing starts, and other
planning indicators.

TYPES OF
FORECASTS

2. TECHNOLOGICAL
FORECASTS - are
concerned with rates of
technological progress,
which can result in birth of
exciting new products,
requiring new plants and
equipments.

TYPES OF
FORECASTS

3. DEMAND FORECASTS are projections of demand

for a companys products
or services. It also called
sales forecasts.

STRATEGIC IMPORTANCE
OF FORECASTING
1. Human Resources
Unanticipated hiring,
training, and laying off
workers
2. Capacity
Inadequate capacity may
lead to shortages or to loss
of customers and market
share.

STRATEGIC IMPORTANCE
OF FORECASTING
3. Supply-chain Management
Good supplier relations and
the ensuing price advantages
for materials and parts
depend on accurate
forecasts.

SEVEN STEPS IN THE

FORECASTING SYSTEM
1. Determine the use of the
forecast
2. Select the items to be
forecasted
3. Determine the time horizon of
the forecast
4. Select the forecasting model(s)
5. Gather the data needed to make
the forecast
6. Make the forecast

FORECASTING
APPROACHES
1. QUANTITATIVE
FORECASTS - use a
variety of mathematical
models that rely on
historical data and/or
associative variables to
forecast demand.

FORECASTING
APPROACHES
2. QUALITATIVE
FORECASTS - incorporate
such factors as the
decision makers intuition,
emotions, personal
experiences, and value
system in reaching a
forecast.

OVERVIEW OF
QUANTITATIVE METHODS
1. TIME-SERIES FORECASTING
- predict on the assumption
that the future is a function of
the past.
Naive Method - the
simplest way to forecast is
to assume that demand in
the next period will be
equal to demand in the

OVERVIEW OF
QUANTITATIVE METHODS
Moving Averages - uses a
number of historical actual
data values to generate a
forecast.
Exponential Smoothing - is
a sophisticated weightedmoving average forecasting
method that is still fairly easy

OVERVIEW OF
QUANTITATIVE METHODS
Trend Projections - this
technique fits a trend line to
a series of historical data
points and then projects the
line into the future for
medium to long-range
forecasts.

OVERVIEW OF
QUANTITATIVE METHODS
2. ASSOCIATIVE FORECASTING
METHODS
Regression Analysis constructed by fitting a line
through a scatter plot of
paired observations between
two variables.

OVERVIEW OF
QUANTITATIVE METHODS
Correlation Analysis - this
measures the degree or
strength of the linear
relationship.

OVERVIEW OF
QUALITATIVE METHODS
1. JURY OF EXECUTIVE
OPINION - Under this method,
the opinions of a group of highlevel experts or managers,
often in combination with
statistical models, are pooled
arrive at a group estimate of
demand.

OVERVIEW OF
QUALITATIVE METHODS
Decision Makers

(Evaluate
2. DELPHI
responses and
METHOD make decisions)
Decisions made
Staff
by three
(Administering
different types survey)
of participants
consists of
Respondents
decision makers,
(People who can
make valuable
staff personnel,
judgments)
and

OVERVIEW OF
QUALITATIVE METHODS
3. SALES FORCE COMPOSITE In this approach, each
salesperson estimates what
sales will be in his or her
region.

OVERVIEW OF
QUALITATIVE METHODS
4. CONSUMER MARKET
SURVEY - This method solicits
input from customers or
potential customers regarding
future purchasing plans.

MONITORING AND
CONTROLLING
1. TRACKING
SIGNAL - is a
FORECASTS
measurement of how well a
forecast is predicting actual
values.

Positive tracking signals

indicate that demand is
greater than forecast.
Negative signals mean that

MONITORING AND
CONTROLLING
FORECASTS

2. ADAPTIVE FORECASTING refers to computer monitoring

of tracking signals and selfadjustment if a signal passes a
preset limit.

FORECASTING IN THE
SERVICE SECTOR
1. SPECIALTY RETAIL SHOPS
Flower shops, may have
other unusual demand
patterns, and those patterns
will differ depending on
holiday.

FORECASTING IN THE
SERVICE SECTOR
1.FAST-FOOD RESTAURANTS
Fast-food restaurants are well
aware not only of weekly, daily,
and hourly but even 15
minutes variations in demands
that influence sales. therefore,
a detailed forecasts of demand
are needed.

THANK YOU!
KATRINA MARIE MANA
REPORTER