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The most important function of business is probably forecasting. A forecast is a starting point for planning. The objective of forecasting is to reduce risk in decision making. In business, forecasts are the basis for capacity planning, production and inventory planning, manpower planning, Planning for sales and market share, financial planning and budgeting, planning for research and development and top management strategic planning.
Who Uses FORECASTS?
Forecasts are needed for marketing production, purchasing, manpower and financial planning. Furthermore top management needs forecasts for planning and implementing long-term strategic objectives and planning for capital expenditures. More specifically, production planners need forecasts in order to:
- Schedule production activities
- Other materials
- Establish inventory levels and
- Plan shipments.
Some other areas that need forecasts include material requirements (purchasing and procurement), labor scheduling, equipment purchases, maintenance requirements and plant capacity planning.
As, soon as the company makes sure that it has enough capacity, the production plan is developed. If the company does not have enough capacity, it will require planning and budgeting decisions for capital spending for capacity expansion.
A diagram displays the relationship between demand forecasting and production/ operations systems.
PLANNING DESIGNING PRODUCTION SHEDULING CONTROLLING
Product design Aggregate production planning Material requirements
Process design Master Scheduling Planning and inventory management
Capacity planning Operations Scheduling Quality assurance
Facilities Investment Project Management
PRODUCTION OF GOODS/SERVICES
The company may choose from a wide range of forecasting techniques. There are basically two approaches to forecasting are qualitative and quantitative.
- Qualitative approach : this approach forecasts based on judgment and opinion
- Quantitative approach
Moving averages and weighted moving averages
Exponential smoothing and trend effects
Trend analysis and classical decomposition
Quantitative models work superbly as long as little or no systematic change in the environment takes place. When patterns or relationships do change by themselves, the objective models are of little use. It is where the qualitative approach based on human judgment is indispensable. Because judgmental forecasting also bases forecasts on observation of existing trends, they are also subject to a number of shortcomings. As a result, the advantage is that they can identify systematic change more quickly and interpret better the effect of such change on the future.
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