Chapter 3: Forecasting
Forecasting is a statement about the future. It is estimating future event (variable), bycasting forward past data. Past data are systematically combined in predetermined way to obtain theestimate. Forecasting is not guessing or prediction.
Forecasting help managers to:
Plan the system
Plan the use of system
Forecasts affect decisions and activities throughout an organization
Product / service designAccounting Cost/profit estimatesFinance Cash flow and fundingHuman Resources Hiring/recruiting/trainingMarketing Pricing, promotion, strategyMIS IT/IS systems, servicesOperations Schedules, MRP, workloadsProduct/service design New products and services
Common features of forecasting:
(deviation is expected).2.
All forecasting techniques assume that there is some
degree of stability
in the system, and “what happened in the past will continue to happen in the future”.3.
Forecasting for a
group of items is more accurate
than the forecast for individuals.4.
Forecasting accuracy increases as
time horizon increases
Elements of good forecast:
Forecasting horizon must cover the time necessary to implement possible changes.2.
It should work consistently.3.
Degree of accuracy should be stated.4.
Should be expressed in meaningful units. Financial planners should know how manydollars needed, production should know how many units to be produced, and schedulers need toknow what machines and skills will be required.5.
to guarantee use of the same information and to make easier comparison to actualresults.6.
Easy to use:
users should be comfortable working with forecast.
Types of forecast by time:
Short-range (days – weeks – months): Job scheduling, work assignments
Time spans ranging from a few days to a few weeks.
Cycles, seasonality, and trend may have little effect.
Random fluctuation is main data component.
Medium term (1-2 years):
Long range forecast (> 2years): change location
Time spans usually greater than one year.
Necessary to support strategic decisions about planning products, processes,and facilities.