Forecasting as a Process, not a Hunch
Generally speaking, managers are faced with decision situations in which they should obtain complete and perfect information and eliminate uncertainty, however evaluating data rationally and logically is the toughest part of the decision-making process and that is where forecasting comes into play. The process of utilizing business forecasting is critical to a company’s production or operations department regardless of whether a company sells goods or services. A company must have a clear picture of how many of those goods or services it can sell, in both short and long terms. It also must look at material that must be obtained, provision for adequate production facilities, labor that must be hired and trained, and the use of logistics services to avoid bottlenecks in distribution of the products and services to the consumers, all these functions can’t be preformed without an effective forecasting process. If this is accomplished correctly, an accurate prediction of demand can be made in a timely and efficient manner, keeping not only the business partners satisfied, but the customers as well.
Eight Step Forecasting Process
Before I get into my discussion on comparing and contrasting forecasting methods, I think it is important to briefly explain the “eight step forecasting process” (Render, Ch 5), which is considered a formal roadmap to assist the manager for whom a business forecast usually means an intuitive guess. The steps are listed below:
Determine the use of the forecast
Select the items or quantities to be forecasted
Determine the time horizon of the forecast
Select the forecasting method(s) that fit your business given your constraints and limitations. 5.
Gather the data needed to make the forecast
Validate the forecasting model
Make the forecast
Implement the results
Determining Time Horizon
In reviewing this eight-step forecasting process, two of the most critical steps in creating a forecast would be determining the time horizon of the forecast and selecting the right forecasting method(s) that fits your business. Determining a time horizon will enable you to target your forecasting goals by the length of your forecast time frame. The time frames for a forecast can be either short-range, medium-range or long-range. Short-range forecasts typically cover the immediate future and are used to deal with issues of daily or weekly operations of a business. For example, at my organization, XYZ Company, short-term forecasts are used to facilitate many logistics activities, such as inventory control, which are at the location-item-month level. In regards to medium-range forecasts, those that cover a two to three month period, my organization uses this time frame for yearly production plans due to the scheduled tasks completed at the corresponding budget. The Earned Value Management Systems (EVMS) area reviews and measures these medium-range forecasts on a quarterly basis. More long-range forecasts, such as Military Programs with a twelve year time period, is used to plan for a ‘new’ product or the expansion of production capacity where there needs to be consideration of long-term financing.
Selecting Forecast Methods
The second most critical step in the forecasting process is the selection of the forecasting method(s) that best fits your business. This is an integral part and the backbone of accurate forecasting - the selection of the right method(s) that will support your prediction of demand. There is no perfect method to predict a perfect forecast, because “too many factors in the business environment cannot be predicted with certainty” (Chase, pg. 466). However developing a strong forecasting strategy that combines two or three methods will give the manager the ability to show commonality between them and a realistic view of the manager’s prediction. The only disadvantage of using...
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