Forecasting

• Forecasting


  Estimating the future value of a variable of interest such as demand or sales
• Planning


  • An integral part of a manager's job
  • Difficult to plan effectively if uncertainties cloud the planning horizon
• Forecast


  Helps managers by reducing some of the uncertainty, thereby enabling them to develop more meaningful plans
• Types of forecasts


  • Long-range (several years or more)
  • Short-term (day or week)
• Long-range forecast example


  • Deciding on the right capacity for a planned power plant that will operate for the next 20 years
• Short-term forecast example


  • Planning and scheduling day-to-day operations
• Elements of a good forecast


  • Timely
  • Accurate
  • Reliable
  • Expressed in meaningful units
  • In writing
  • Simple to understand and use
  • Cost-effective
• Timely forecast


  Covers the time necessary to implement possible changes
• Accurate forecast


  Degree of accuracy should be stated
• Reliable forecast


  Works consistently
• Meaningful units


  Financial planners need dollars, production planners need units, schedulers need machines and skills
• Written forecast


  Increases the likelihood that all concerned are using the same information
• Simple forecasting technique


  Users are more comfortable working with them
• Cost-effective forecast


  Benefits should outweigh the costs
• Approaches to forecasting


  • Qualitative
  • Quantitative
• Qualitative methods


  Consist mainly of subjective inputs, which often defy precise numerical description
• Quantitative methods


  Involve either the projection of historical data or the development of associative models that attempt to utilize causal (explanatory) variables to make a forecast
• In practice, either approach or a combination of both approaches might be used to develop a forecast