chapter four : forecasting demand

CHAPTER 4 : FORECASTING DEMAND   

WHAT IS FORECASTING???? 

• used by companies to determine how to allocate their budgets for an upcoming period of time. we also can say it like an organization predicting a future event.
  
• it is effect decision and activities throughout an organization such as accounting, finance, human resources, marketing, and product or service design. 
• This is use of forecast : 

            1) Accounting - it will predict about cost and profit estimate.

            2) finance - it will predict cash flow and funding.

            3) Human resources - it will forecast about hiring, recruiting and 

                                           training.

            4) Product and services design -predict new products and services. 

• an organization will use three major type of forecasts in planning future operations : 

            1) Economic Forecasts =  it is planning indicators that are valuable 

                                                in helping organizations prepare medium             

                                                long-range forecasts.for example address 

                                                business cycle such as inflation rate,

                                                money supply, housing starts and etc. 

            2) Technological Forecasts = it is predict rate of 

                                                             technological progress.  

                                                            another one is impacts

                                                            development of new products.

             3) Demand Forecast = projection of company sales for  

                                                   each time period in the planning 

                                                   horizon. It is like we predict sales of 

                                                   existing products.

• ELEMENT OF GOOD FORECAST. 

                    1) Timely

              2) Reliable

              3) Accurate

              4) Meaningful 

              5) Easy to use

• SEVEN STEPS IN FORECASTING SYSTEM. 
  
  
           1) Determine the use of the forecast.
     
           2) Select item 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.
  
  
           7) Validate and implement the result.
  
  
• Forecasting approaches are divided by two which is Qualitative approaches and Quantitative approaches. 

QUALITATIVE APPROACHES 

-Used when situation is vague and little data exist like new product and new technology.

-it is also involved intuition and experienced such as forecasting sales on internet.

- there are four different qualitative forecasting techniques : 

         1) Jury of executive opinion. 

         2) Delphi Method.

         3) Sales force composite.

         4) Consumer market survey.

QUANTITATIVE APPROACHES

-Used when situation is 'stable' and historical data exist like existing product and current technology. 

-Involves mathematical technique for an example forecasting sales of color televisions.

-there are two types of quantitative approaches model. : 

•        Times series model

        1) Naive approaches

        2) Moving average.

        3) Exponential smoothing.

        4) Trend Projection.

•        Associative model

         5) Linear Regression

MOVING AVERAGE METHOD 

-Is a series or arithmetic means.

-uses if little or no trend.

-used often for smoothing that provide overall impression of data over time. 

-This is the way of calculation :

          

           Moving average = ∑ demand in previous n periods

                                                                           n

Moving Average Example

               Actual                                3-Month

  Month             Shed Sales                    Moving Average

January                10  

   

February              12 

March                    13 

April                       16                           (10+12+13)/3 = 11 2/3

May                        19                           (12+13+16)/3 = 13 2/3

June                       23                           (13+16+19)/3 = 16

July                        26                           (16+19+23)/3 = 19 1/3

WEIGHTED MOVING AVERAGE

- Used when tense is present 

-weight based on experienced or intuition.

        

      weighted  Moving average = ∑ (weight for period n) x (demand in period n)

                                                                                       ∑  weights

Weighted moving average example 

                                         Actual                     3-Month Weighted

  Month                      Shed Sales                  Moving Average

January                           10 

February                         12 

Marc                                 13 

April                                 16                       [(3 x 13) + (2 x 12) + (10)]/6 = 121/6

May                                  19                      [(3 x 16) + (2 x 13) + (12)]/6 = 141/3

June                                 23                      [(3 x 19) + (2 x 16) + (13)]/6 = 17

July                                   26                      [(3 x 23) + (2 x 19) + (16)]/6 = 201/2   

COMMON MEASURE OF ERROR

Mean Absolute Deviation (MAD) 

MAD = ∑ | actual - forecast | 

                              n

Mean Squared Error (MSE) 

MSE = ∑  (forecast error)  2

                          n-1

 chapter 3 : MANAGING PROJECT.  

PROJECT

Is an interrelated set of activities that has definite starting and ending point and the result in unique product or services.  for example is building construction and introducing a new product. 

      -PROJECT ORGANIZATION

           this is to make sure that program can run smoothly on day by day basis while new project will 

           successfully completed. 

PROJECT MANAGEMENT TECHNIQUES 

There are two technique which is PROGRAM EVALUATION AND REVIEW TECHNIQUE(PERT) and the CRITICAL PATH METHOD(CPM). They were both developed to help managers schedule, monitor and control large complex project. 

    -PERT and CPM NETWORK METHOD 

         there are three : 1) ACTIVITY- the smallest unit of work effort consuming both time and resources 

                                                          that the project manager can schedule and control. 

                                 2)PRECEDENCE RELATIONSHIP-  A sequencing constraint between interrelated 

                                                                                             activities by which one activity cannot start 

                                                                                             until a preceding activity has been completed.

 

                                3)SCHEDULE- A plan that sets priorities, determines start and finish times, and 

                                                          allocates resources to accomplish the activities. 

  - NETWORK DIAGRAM AND APPROACHES 

        there are two approaches for drawing a project network. which is ACTIVITY ON NODE (AON) 

        and ACTIVITY ON ARROW(AOA). for AON it is a network diagram in which node designated 

        activities. While for AOA means a network diagram in which arrow designate activities. furthermore,

        CRITICAL PATH  is about the computed longest time path(s) through a network. 

                                         

                                                                  example of AOA

                                     

                                                                 example of AON 

okay, now we gonna talk about how to find a slack time. slack time is the length of time an activity can be delayed without delaying the entire project. here the calculation how to calculate the slack time. this is very easy to understand. 

SLACK = LS - ES // SLACK = LF - EF 

example of slack time calculation

lastly, in PERT they employ a probability distribution based on three time estimates for each activity , as follows : 

          1) optimistic time (a) = the best activity completion time that could be obtained in a PERT network. 

          2) pessimistic time (b) = the worst activity time that could be expected in a PERT network. 

          3) most likely time (m)= the most probable time to complete an activity in a PERT network.