CHAPTER: 3

FORECASTING (MSC 301)

MD. TAMZIDUL ISLAM

FACULTY, BBS

A prudent man foresees the difficulties

ahead and prepares for them the
simpleton goes blindly on and suffers the
consequences.
-by Doug Welch

What is Forecasting
Forecasting is a prediction of future events
used for planning (capacity, production,
scheduling) purpose.
Two Components:
1. History: Analysis of past demand
2. Events: Understand how market is changing

Get the Right Balance

The best forecast is:
Built on historical information
Modified by the use of market Information
To use forecasts to their full advantage, an
understanding of the methods, their appropriateness to
different situations and their limitations is required.

The consequences of inaccurate forecasting

Excess/Lack of Inventory
Lost Sales/revenue
Dissatisfied customer

Forecasting concepts
Basis of forecasting
Level of aggregation
Unit of measurement

Fish point

n you identify the limitation of taking revenue

as unit of measurement?
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The Role Of Forecasting

Marketing: Prediction of market
characteristics, market share, market price and
trends in new product development.
Sales: - Prediction of product demand, and the
addition of market intelligence.
Production: - Conversion of forecasted
demand into inventory and capacity planning
and use of forecast error in safety stock
calculations.
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The Role Of Forecasting

Finance: - Budgeting. Predictions of cash flow,
expenses and revenues.
Personnel: - Prediction of human resource
requirements and supply e.g. demographic
trends. Prediction the level of labor turnover,
absenteeism and tardiness.
General Management: - Prediction of general
economic trends that affect the long-term future
of the business.
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The Bullwhip/Forrester Effect

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Alternate to Forecasting
Efficient Customer Response (ECR)
Vendor Managed Inventory (VMI)

Push Vs Pull
Make to Order Vs Make to Stock

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Patterns of Demand
Horizontal: Fluctuation of demand around the
constant mean
Trend: Repeatable pattern of increases or
decreases in demand.
Cyclical: Gradual increase or decreases in
demand over longer period of time
Random: Unforecastable, variation in demand

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Factors Affecting Demand

External Factors:
Economic
Govt. Policy
Political Environment
Consumer taste
Competitors activity
Success/failure of one product may affect the
demand of complementary products

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Factors Affecting Demand

Internal Factors:
Change in products or services design
Price and Advertising activity
Incentives/commission
Expansion/reduction of geographical area
No. of target customer
Company strategy
Production process
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Forecasting Process

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