Chapter 3 part 6
In this part, it explained how to use forecast information. The use of computer software in forecasting as
well as the operations strategy that are very helpful in operation management.
USING FORECAST INFORMATION
A manager can take a reactive or a proactive approach to a forecast. A reactive approach views
forecasts as probable future demand, and a manager reacts to meet that demand (e.g., adjusts
production rates, inventories, the workforce). Conversely, a proactive approach seeks to actively
influence demand (e.g., by means of advertising, pricing, or product/service changes).
Generally speaking, a proactive approach requires either an explanatory model (e.g.,
regression) or a subjective assessment of the influence on demand. A manager might make
two forecasts: one to predict what will happen under the status quo and a second one based on
a “what if ” approach, if the results of the status quo forecast are unacceptable.
COMPUTER SOFTWARE IN FORECASTING
Computers play an important role in preparing forecasts based on quantitative data. Their use
allows managers to develop and revise forecasts quickly, and without the burden of manual
computations. There is a wide range of software packages available for forecasting. The Excel
templates on the text Web site are an example of a spreadsheet approach. There are templates
for moving averages, exponential smoothing, linear trend equation, trend-adjusted exponential
smoothing, and simple linear regression. Some templates are illustrated in the Solved
Problems section at the end of the chapter.
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OPERATIONS STRATEGY
Forecasts are the basis for many decisions and an essential input for matching supply and
demand. Clearly, the more accurate an organization’s forecasts, the better prepared it will be
to take advantage of future opportunities and reduce potential risks. A worthwhile strategy can
be to work to improve short-term forecasts. Better short-term forecasts will not only enhance
profits through lower inventory levels, fewer shortages, and improved customer service, they
also will enhance forecasting credibility throughout the organization: If short-term forecasts
are inaccurate, why should other areas of the organization put faith in long-term forecasts?
Also, the sense of confidence accurate short-term forecasts would generate would allow
allocating more resources to strategic and medium- to longer-term planning and less on shortterm,
tactical activities.
Maintaining accurate, up-to-date information on prices, demand, and other variables can
have a significant impact on forecast accuracy. An organization also can do other things to
improve forecasts. These do not involve searching for improved techniques but relate to the
inverse relation of accuracy to the forecast horizon: Forecasts that cover shorter time frames
tend to be more accurate than longer-term forecasts. Recognizing this, management might
choose to devote efforts to shortening the time horizon that forecasts must cover. Essentially,
this means shortening the lead time needed to respond to a forecast. This might involve building
flexibility into operations to permit rapid response to changing demands for products and
services, or to changing volumes in quantities demanded; shortening the lead time required to
obtain supplies, equipment, and raw materials or the time needed to train or retrain employees;
or shortening the time needed to develop new products and services.
Lean systems are demand driven; goods are produced to fulfill orders rather than to hold in
inventory until demand arises. Consequently, they are far less dependent on short-term forecasts
than more traditional systems.
In certain situations forecasting can be very difficult when orders have to be placed far in
advance. This is the case, for example, when demand is sensitive to weather conditions, such
as the arrival of spring, and there is a narrow window for demand. Orders for products or services
that relate to this (e.g., garden materials, advertising space) often have to be placed
many months in advance—far beyond the ability of forecasters to accurately predict weather
conditions and, hence, the timing of demand. In such cases, there may be pressures from
salespeople who want low quotas and financial people who don’t want to have to deal with
the cost of excess inventory to have conservative forecasts. Conversely, operations people may
want more optimistic forecasts to reduce the risk of being blamed for possible shortages.
Sharing forecasts or demand data throughout the supply chain can improve forecast quality
in the supply chain, resulting in lower costs and shorter lead times. For example, both
Hewlett-Packard and IBM require resellers to include such information in their contracts.
The qualitative techniques described in this chapter include consumer surveys, salesforce estimates,
executive opinions, and manager and staff opinions. Two major quantitative approaches are described:
analysis of time-series data and associative techniques. The time-series techniques rely strictly on the
examination of historical data; predictions are made by projecting past movements of a variable into
the future without considering specific factors that might influence the variable. Associative techniques
attempt to explicitly identify influencing factors and to incorporate that information into equations that
can be used for predictive purposes.
All forecasts tend to be inaccurate; therefore, it is important to provide a measure of accuracy. It is
possible to compute several measures of forecast accuracy that help managers to evaluate the performance
of a given technique and to choose among alternative forecasting techniques. Control of forecasts
involves deciding whether a forecast is performing adequately, typically using a control chart.
When selecting a forecasting technique, a manager must choose a technique that will serve the
intended purpose at an acceptable level of cost and accuracy.
The various forecasting techniques are summarized in Table 3.6 . Table 3.7 lists the formulas used in
the forecasting techniques and in the methods of measuring their accuracy. Note that the Excel templates
on the text Web site that accompanies this book are especially useful for tedious calculations.
