Forecasting Demand Fluctuations

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Although demand forecasting is usually the responsibility of the sales and/or marketing functions, it is a very important input into the capacity planning and control decision, and so is of interest to operations managers. After all, without an estimate of future demand it is not possible to plan effectively for future events, only to react to them. It is therefore important to understand the basis and rationale for these demand forecasts. As far as capacity planning and control is concerned, there are three requirements from a demand forecast.

It is expressed in terms which are useful for capacity planning and control If forecasts are expressed only in money terms and give no indication of the demands that will be placed on an operation’s capacity, they will need to be translated into realistic expectations of demand, expressed in the same units as the capacity (for example, machine hours per year, operatives required, space, etc.).

It is as accurate as possible. In capacity planning and control, the accuracy of a forecast is important because, whereas demand can change instantaneously, there is a lag between deciding to change capacity and the change taking effect. Thus many operations managers are faced with a dilemma. In order to attempt to meet demand, they must often decide output in advance, based on a forecast which might change before the demand occurs, or worse, prove not to reflect actual demand at all.

It gives an indication of relative uncertainty Decisions to operate extra hours and recruit extra staff are usually based on forecast levels of demand, which could in practice differ considerably from actual demand, leading to unnecessary costs or unsatisfactory customer service.

In many organizations, capacity planning and control is concerned largely with coping with seasonal demand fluctuations. Almost all products and services have some demand seasonality and some also have supply seasonality, usually where the inputs are seasonal...
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