Forecasting Methods and Control

Forecasting vs Prediction
Prediction
 Is a subjective and is more governed by
personal bias and preferences
 Forecasting vs Prediction
Forecasting
 Is the activity in the planning process where
detailed studies of the past and present scenarios
are carried out.

 Is an objective and scientific method that is based

on previous historical data that are available for
estimation
 Types of Forecast
Economic Forecast
 Address the business cycle by predicting inflation rates,
money supplies, housing starts, and other planning
indicators.

Technological forecasts
 are concerned with rates of technological progress,
which can result in the birth of exciting new products,
requiring new plants and equipment.
 Types of Forecast
Demand forecasts
 are projections of demand for a company’s
products or services
 Forecasting Time Horizons
Forecast is usually classified by the future time
horizon that it covers. Time horizons fall into three
categories:

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, and
production levels.
 Forecasting Time Horizons

Medium-range forecast: A medium-range, or

intermediate, forecast generally spans from 3
months to 3 years. It is useful in sales planning,
production planning and budgeting, cash
budgeting, and analysis of various operating plans.
 Forecasting Time Horizons

Long-range forecast: Generally 3 years or more in

time span, long-range forecasts are used in
planning for new products, capital expenditures,
facility location or expansion, and research and
development.
Classification of Forecasting Methods

Qualitative Methods

Time- Series Methods

Causal Methods
Qualitative Methods

 This method is used for strategic level

purposes usually on a longer horizon for

facilitating decision making

 Types of Qualitative Method
1. Grassroot forecasting
2. Historical Analogy
3. Customer Surveys
4. Executive Opinions
5. Delphi Method
 Grassroot forecasting

 Those who are in direct contact with

customers are taken as good source of

information for inputs to forecasting.

 Historical Analogy

 Life cycle of similar products or services in the

market are compared for getting insights to

future development
 Customer Surveys

 This help companies to get critical inputs on

various aspect of a product.

 Executive Opinions

 This type of forecasting uses group of experts

from different fields as marketing, sales,

operations and etc.

 Delphi Method

 It is an iterative group process intended to

achieve a consensus forecast.

 Time- Series Method of Forecasting
 The demand data is plotted on a time scale

and an analysis of them is done for decoding

the underlying patterns or shapes on it

 Used historical data only

 Causal Methods/ Associative Method

 It is incorporate the variables or factors might

influence the quantity being forecast.

 The variation in demand are identified and a

relationship between demand and factors are

used