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Introduction to Forecasting – Production and Operations Management
Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgmental methods. Usage can differ between areas of application: for example, in hydrology the terms “forecast” and “forecasting” are sometimes reserved for estimates of values at certain specific future times, while the term “prediction” is used for more general estimates, such as the number of times floods will occur over a long period.
The easiest method of forecasting is that of extrapolation. If sales or production capacity needs in the past years have been 85, 90,95 units, then in the coming year we could expect a sales/production capacity requirement of 100 units.
If the past data is linear in nature, extrapolation should be applied. Whereas presence of any upward or downward swings, does not permit using the extrapolation. Many a time the upward and downward swings are quite random or one-time effects.
Methods used
- Qualitative – based on the opinion and judgment of consumers and experts; they are appropriate when past data are not available as the Delphi method, market research, and historical life-cycle analogy.
- quantitative – used to forecast future data as a function of past data as , simple and weighted N-Period moving averages, simple exponential smoothing, poisson process model based forecasting
METHODS TO DEAL FLUCTUATING DEMAND
1. One obvious way to deal the fluctuating demand is to plan the capacity based on peak demand as opposed to average demand. Of course, the relative economics of providing the service (costs) versus a dissatisfied customer (lost revenue, lost goodwill, damaged image) needs to be worked out.
2. Since service output is non-inventoriable, a satisfy capacity may be provided (in place of safety stock in a physical goods manufacturing company). Capacity includes in its gamut the service providers or manpower, the space where service is provided, the equipment in equipment-oriented services, and the materials. Capacity management is crucial to the success of the service organisation.
3. In any case, the demand can be rationed through a queuing system or reservation system. This is much prevalent in India. However, in these cases, the organisation is basically inventorying the demand rather than the supply.
4. Other way to deal with fluctuations in demand is to influence customer demand by offering a different price and product package during periods of low demand.
5. Capacity management can also be done by capacity allocation. For instance, the airlines can change the percentage of the capacity allocated for first class, business and economy classes according to the season of demand.
6. If the degree of automation can be increased without affecting the overall quality to the customer, then this would help in meeting the peaks in demand for services.
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