Demand Forecasting - Objectives, Classification and Characteristics of a Good Forecast


For an organization to provide customer delight it is important that organization can understand what customer wants and how much does they want. If an organization can gauge future demand that manufacturing plan becomes simpler and cost effective.

The process of analyzing and understanding current and past information to understand the future patterns through a scientific and systemic approach is called forecasting. And the process of estimating the future demand of product in terms of a unit or monetary value is referred to as demand forecasting.

The purpose of forecasting is to help the organization manage the present as to prepare for the future by examining the most probable future demand pattern. However, forecasting has its constraint for example we cannot estimate a pattern for technologies and product where there are no existing pattern or data.

Business Forecasting Objective

The very objective of business forecasting is to be accurate as possible, so that planning of resources can be done in a very economical manner and therefore, propagate optimum utilization of resources. Business forecasting helps in establishing relationship among many variables, which go into manufacturing of the product. Each forecast situation must be analyzed independently along with forecasting method.

Classification of Business Forecasting

Business forecasting has many dimensions and varieties depending upon the utility and application. The three basic forms are as follows:

Economic Forecasting: these forecasting are related to the broader macro-economic and micro-economic factors prevailing in the current business environment. It includes forecasting of inflation rate, interest rate, GDP, etc. at the macro level and working of particular industry at the micro level.

Demand Forecast: organization conduct analysis on its pre-existing database or conduct market survey as to understand and predict future demands. Operational planning is done based on demand forecasting.

Technology Forecast: this type of forecast is used to forecast future technology upgradation.

Timeline of Business Forecasting

A forecast and its conclusion are valid within specific time frame or horizon. These time horizons are categorized as follows:

Long Term Forecast: This type of forecast is made for a time frame of more than three years. These types of forecast are utilized for long-term strategic planning in terms of capacity planning, expansion planning, etc.

Mid-Term Forecast: This type of forecast is made for a time frame from three months to three years. These types of forecasts are utilized production and layout planning, sales and marketing planning, cash budget planning and capital budget planning.

Short Term Forecast: This type of forecast is made of a time frame from one day to three months. These types of forecasts are utilized for day to day production planning, inventory planning, workforce application planning, etc.

Characteristics of Good Forecast

A good forecast is should provide sufficient time with a fair degree of accuracy and reliability to prepare for future demand. A good forecast should be simple to understand and provide information relevant to production (e.g. units, etc.)

Forecasting Methods

Forecasting is divided into two broad categories, techniques and routes. Techniques are further classified into quantitative techniques and qualitative techniques. Quantitative techniques comprise of time series method, regression analysis, etc., where as qualitative methods comprise of Delphi method, expert judgment.

Routes forecasting consist of top-down route and bottom-up route.

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