An Overview of Forecasting Error among International Manufacturers

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ABSTRACT

This article summarizes the most recent survey results in regard to forecasting practices and forecasting error of sales for Global Manufacturing Research Group (GMRG) participants. GMRG includes over 200 manufacturing companies from Hungary, Lebanon, Italy, Taiwan, and the United States. Participants in GMRG reported average forecast errors for sales of around 20%. A number of findings concerning use of forecasts, methods of forecasting, factors considered in the sales forecast, primary authority for the forecast, and variation in forecasting error by country are detailed. The practices of GMRG participants may be of interest to forecasters in like-minded companies.

INTRODUCTION

The Global Manufacturing Research Group (GMRG) is an organization of academic researchers interested in international manufacturing research. GMRG has administered surveys of manufacturing practices to companies worldwide; this paper summarizes results of the third survey, collected in 2003-2004, that pertain to forecasting accuracy, including methods of forecasting used, who is responsible for the forecast function, factors considered in the sales forecast, and how the forecasts are used. The international comparisons of forecast error and reliance on various forecasting techniques are of particular interest.

Companies that participated in the survey were located in Italy, Lebanon, Hungary, Taiwan, and the northwestern United States, and included firms from the following manufacturing industries: electronics, machinery, cables, plastic furniture, plastic containers, plastic packaging, food products, textiles and building materials. The companies and countries were not randomly selected for inclusion but participated based on location, availability of management information, willingness to participate and products manufactured.

The 235 companies in the sample ranged in size from 6 employees to 9,500 employees, with a median of 142 employees, and with sales ranging from $50,000 to $16.3 billion and a median of $29 million in sales. Many, but not all, companies reported exporting their products; on average, they reported that about 45% of their sales were exports. The companies were also mainly domestically owned (78% of ownership, on average, was domestic).

The companies in this sample relied to a greater degree on management opinion than on quantitative (e.g. regression) or qualitative (e.g. survey) techniques in forming their forecasts. "Forecasts" refer to total sales of the company. The variable of interest is the average percent forecast error over the past two years.

SUMMARY OF PREVIOUS WORK

Wacker and Sprague (1995; 1998) used previous GRMG survey results to examine forecasting accuracy. They first used a sample of UK manufacturers to investigate the effects of institutional factors, such as technology culture and forecasting methods used, on forecast accuracy (1995). They found that companies with newer technology tended to have lower forecast error, and companies that measured forecast error had more accurate forecasts. Companies that had high forecast error modified their forecasts more frequently. In addition, companies for which sales planning was the primary purpose of the forecast tended to have more accurate forecasts. Companies in which top management was involved in the forecasting procedure had lower forecast accuracy.

A subsequent study by Wacker and Sprague (1998) used GMRG survey results from seven countries, including Germany, Japan, Mexico, New Zealand, Spain, Sweden, and the United States, to compare the relative effectiveness of management behaviors that affect forecast accuracy. This study found country differences in forecasting that were partially explained by Hofstede's cultural values dimensions. For example, companies in countries with high individualism tended to be more technology oriented and top management less involved in forecast development than companies in collectivism countries. …