What Is Forecasting?
One of the steps, nay 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. Without planning managers cannot organize people and resources effectively. Forecasting is fundamental to the process of planning.
Forecasts are statements about the future, specifying the volume of the sales to be achieved and equipment, materials and other inputs needed to realise the expected sales. In technical terms, forecasting is estimating the future demand for the products and services and the resources necessary to produce these outputs. The starting point in forecasting is sales or demand forecasting.
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 the 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 the planning and decision-making process, production managers must be clear about the horizon of the forecasts. Additionally, they must also be clear about the method of forecasting and the units of forecasting. Forecasting is an important planning tool for the organizations.
Long range forecasts
Long range forecasts provide operations managers with the information to make important decisions such as following-
1.Selecting a product design.
2.Selecting a product processing scheme for a new product
3.Selecting a plan for the long-term supply of scarce materials
4.Selecting a long-term production capacity plan
5.To build new buildings and to purchase new machines
Short-term forecasts provide, operations managers with the information to make important decisions such as following-
1.How much inventory of a particular product should be carried next month?
2.How much of each product should be scheduled for production next week?
3.How much of each raw material should be ordered for delivery next week?
Forecasting methods can broadly be classified into two main categories—quantitative methods and qualitative methods.
Qualitative methods are also known as judgmental methods. Judgmental methods rely on an expert’s opinion in making a prediction about the future. These methods are suitable for intermediate to long-range forecasting tasks. The use of judgment in forecasting sounds unscientific and ad hoc, but, where new products are sought to be introduced, there are few alternatives other than using the informed opinion of knowledgeable people. Various judgmental methods are—the executive opinion method, the Delphi method, market survey, historical analogy etc.
These methods seek to identify patterns in the past data. In order to systematically analyse data, managers use a time series analysis. In this, analysts plot demand data on a time scale, study the plots and look for consistent shapes or patterns. Demand pattern can be of three shapes—horizontal, cyclic or linear. Various important quantitative methods are- Simple-moving average method (SMA), weighted-moving average (WMA), regression analysis etc.