FORECASTING

FORECASTING

Is the art and science of preceding future events. It may involve taking
historical data and projecting them into the future with some sorts of
mathematical model may be a subjective or intuitive prediction. Or it may
involve a combination of these that is, a mathematical model adjusted by a
manager’s good judgment.
 Forecasting Time Horizons
(1) Short-range forecast
This forecast has a time span of up to one year but is generally less than
three months. It is used for planning purchasing, job scheduling, work force
levels, job assignments, and production level.
(2) Medium-range forecast
A medium, or intermediate, forecast generally from 3 months to 3 years. It
is useful sales planning, production planning and budgeting, cash budgeting,
and analyzing various operating plans.
(3) Long-range forecast
Generally 3 years or more in time span, long-range forecast are used in
planning for new products, capital expenditures, facility location expansion, and
research and development.
 Type of Forecasts
3 major types of forecasts in Planning Future
Operations:

(a) Economic Forecasts- address the business cycle by predicting

inflation rates, money supplies, housing starts and other planning indicators
(b) Technological forecasts- are concerned with rates of
technological progress, which can result in the birth of exciting new products,
requiring new plants and equipment.
(c) Demand Forecasts- are projections of demand for a company’s
product or services. These forecasts also called sales forecasts, drive company’s
production, capacity, and scheduling systems and serve as inputs to financial,
marketing, and personnel planning.
 The Strategic Importance of Forecasting
The forecasts is the only estimate of demand until actual demand
becomes known. Forecasts of demand therefore drive decisions in
many areas:
Human Resource – Hiring, training and laying off workers all depend
on anticipated demand. If the human resource department must hire additional
workers without warning, the amount of training declines and the quality of
the workers suffers.
Capacity- When capacity is inadequate, the resulting shortages can mean
undependable delivery, loss of customers, and loss of market share.

Supply-Chain Management- Good supplier relations and the

ensuring price advantage for materials and parts depend on accurate forecasts.
 Elements of Good Forecast
1. The forecast should be timely.
2. The forecast should be accurate and the degree of accuracy should be
stated.
3. The forecast should be reliable; it should work consistently.
4. The forecast should be expressed in meaningful units.
5. The forecast should be in writing.
6. The forecasting technique should be simple to understand and use.
 William J. Stevenson

•Accurate—some degree of accuracy should be determined and stated so

that comparison can be made to alternative forecasts.
•Reliable—the forecast method should consistently provide a good forecast
if the user is to establish some degree of confidence.
•Timely—a certain amount of time is needed to respond to the forecast so
the forecasting horizon must allow for the time necessary to make changes.
•Easy to use and understand—users of the forecast must be confident
and comfortable working with it.
•Cost-effective—the cost of making the forecast should not outweigh
the benefits obtained from the forecast.