One of the steps, say the very first one, in the process of management is planning. Planning is understood as the process of setting goals and choosing the means to achieve these goals. Planning is essential for, without it, managers cannot organise people and resources effectively.
Meaning and Definition
Forecasting is fundamental to planning. Forecasts are statements about future, specifying the volume of sales to be achieved and equipment, materials and other inputs needed to realise the expected sales. A popular definition of forecasting is that, it is estimating the future demand for products and services and the resources necessary to produce these outputs. Starting point in forecasting is sales or demand forecasting. Sales forecasts trigger all other forecasts in production function.
Need for Sales Forecasting
Following are some of the reasons, why operations managers must develop forecasts :
1. New Facility Planning
Strategic activities such as designing and building a new factory or designing and implementing a new production process, might take a long time, say five years. This requires long range forecasts of demand for existing and new products, so that, operations managers can Lave the necessary lead time to build the processes to produce the products and services when needed. 2. Production Planning
The rate of production must vary to meet the fluctuating demand from time to time (usually month to month). A time period of several months may be necessary to change the capacities of production processes Intermediate range demand forecast, helps operations managers get the lead time necessary to provide the capacity to produce the products to meet the variable monthly demands. 3. Work Force Scheduling
Where the demand for products and services varies from week to week, it is necessary to vary the work force levels to meet the varying demands by using overtime, lay-offs or hiring. For this, operations managers need short range demand forecasts to enable them to have the lead time necessary to provide work force the changes to produce products or service to meet the weekly demands.
4. Financial Planning
Sales forecasts are the driving force in budgeting Budgeting is used by many operations managers to plan and control the financial performance of their production department. Types of Forecasts
There are long-term forecasts as well as short-term forecasts. Operations managers need long-range forecasts to make strategic decisions about products, processes and facilities. They also need short-term forecasts to assist them in making decisions about production issues that span, only the next few weeks. Since forecasting forms an integral part of planning and decision-making, production managers must be clear about the horizon of forecasts - month or year, for example. Additionally, they must also be clear about the method of forecasting and unit of forecasting (gross rupee sales, individual product demand, etc). Application of Long-range and Short-range Demand Forecasts
(a) Long range Forecast
Long range forecasts provide, operations managers, with informatior decisions such as the following :
1.Selecting a product design. The final design is dependent on expected sales volume. If the demand is high, the design should be such that the product can be mass-produced to ensure low-cost manufacture. 2.Selecting a production processing scheme (i.e., process design) for a new product. 3.Selecting a plan for the long range supply of scarce materials. 4.Selecting a long range production capacity plan.
5.Selecting a long range financial plan for acquiring funds for capital investment. 6.To build new buildings and to purchase new machines.
7.To develop new sources of materials and new sources of capital funds (finance).
(b) Short-range Forecast
Short range sales forecasts provide operations managers, with information to make important decisions such as the following :...