Forecasting and its types
Forecasting is a prediction of what will occur in the future. It is an uncertain process that is vital to survival in today’s international business environment. Rapid technological advances have given consumers greater product diversity as well as more information on which they make their product choices. Managers try to forecast with as much accuracy as possible, but that is becoming increasingly difficult in today’s fast-paced business world.
There are two types of forecasting methods. These methods help to provide reliable guidelines for decision making, but cannot provide totally accurate results.
Qualitative methods are based on:
- past experience
- best guesses
Quantitative methods are based on:
- mathematical methods
- two traditional types
- time series
Forecasting and Supply Chain Management
Forecasting is a critical component of Supply Chain Management. The supply chain involves everything that pertains to producing a product or service from a company’s suppliers all the way to the customers. Forecasts help determine the amount of inventory to be kept on hand, how much raw material should be purchased, and how much of a product should be made. Inaccurate forecasts can lead to costly inventory buildup or stockouts. Both of these events are harmful in a business world where customer service is of the utmost importance.
Components of Demand Forecasting
There are 2 main factors that help determine the type of forecasting method that will be used. They are:
- Time Frame
- Behavior and the Possible Existance of Patterns
The length of the forecast depends on product market changes and susceptibility to technological changes. The classifications are generalizations. Short, Mid and Long range is all relative to the business and what is being forecast.
Short to Mid-Range forecasts are usually anywhere from daily to up to two years in length. They are commonly used to determine production and delivery schedules and to establish inventory levels.
Long-Range forecasts are generally over two years into the future. They are usually used for strategic planning. Strategic planning determines where the company is headed in the future. It is used to establish long-term goals, plan new products, enter new markets and develop new facilities & technology.
Demand sometimes behaves in random and irregular ways. Other times it exhibits predictable behavior. The 3 main types of predictable behavior are trends, cycles, and seasonal patterns.
A trend is a gradual, long-term, upward or downward movement in demand. A current trend is the steady increase in sales of personal computers over the past few years.
A cycle is an up-and-down movement in demand that repeats itself over a longer time span. Automotive sales often behave in a cyclical pattern.
A seasonal pattern is a repetitive movement in demand that occurs periodically. Sales of winter sports equipment is seasonal by nature.