Chapter 11

Chapter 11 - Chapter 11: Forecasting Forecasting is the art...

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Forecasting is the art and science of predicting future events. Forecasting methods must be carefully selected for the particular use it is intended to serve. Because forecasting is never 100% accurate, the variation may be absorbed through extra capacity, inventory, or rescheduling of orders. There are three ways of accommodating forecasting errors: 1. Try to reduce error through better forecasting 2. Build more flexibility into operations and the supply chain 3. Reduce the lead time over which forecasts are required All forecasts ought to have two numbers; one for the best estimate of demand (mean, median, or mode), and the other for forecasting error (standard deviation, absolute deviation, or range). 11.1 A Forecasting Framework Whenever the demand is not constrained by capacity or other management policies, the forecasting of demand will always be the same as the forecasting of sales. Forecasting deals with what we think will happen in the future. Planning deals with what we think should happen in the future. For process design purposes, forecasting is needed to decide on the type of process and the degree of automation to be used. The longer the range of time that is being forecasting, the less it is necessary to be stringent upon the small details (i.e. forecasting for short term, less than six months, ought to be extremely accurate regarding details). There are three types of forecasting methods associated with decisions made by the finance, operations, HR, and marketing department, and they are the following: 1. Qualitative forecasting methods: Rely on managerial judgment; they do not use specific models. Qualitative methods are useful when there a lack of data or when past data are not reliable predictors of the future. 2. Quantitative forecasting methods: There are two types of quantitative methods, and they are time-series and casual forecasting. Quantitative methods utilize and underlying model to arrive at a forecast. The basic assumption for all quantitative forecasting methods is that past data and data patterns are reliable predictors of the future. Time ranges will be referred to as long-term if they are more than two years, medium range if they are between six months to two years, and short term if they are less than six months. 11.2 Qualitative Forecasting Methods
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This note was uploaded on 05/11/2008 for the course OMS 3001 taught by Professor Asokedey during the Spring '08 term at Minnesota.

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Chapter 11 - Chapter 11: Forecasting Forecasting is the art...

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