Academic journal article The Journal of Business Forecasting Methods & Systems

Forecasting: Who, What, When and How

Academic journal article The Journal of Business Forecasting Methods & Systems

Forecasting: Who, What, When and How

Article excerpt

Who does the forecasting and how often? What items are forecasted and which techniques are used in preparing forecasts? Are firms satisfied with their forecasting process? How do the forecasting efforts differ between manufacturers and service-oriented firms, between industrial and consumer product firms, and between large and small firms. These are some of the questions which this article attempts to explore. The results are based on the survey recently conducted by the authors.

Woody Hayes, the former Ohio State football coach, when asked why he believed in the three yards and a pile of dust rushing attack replied, "Because, when you pass the football three things can happen, two of which are bad." Managers have the same dread of forecasting that Woody had of the pass. Three things can happen when one forecasts, two of which are bad: one is over forecast and the other is under forecast. Looking at a time when forecasters need good forecasts more than ever, many managers are downplaying their importance. One reason may be that, like many other things, when forecasts are right, you don't hear about them. But when they are wrong...

Forecasting is estimating some future event or condition which is outside of an organization's control and provides a basis for managerial planning. Organizations forecast so that they can plan and help shape their future. Forecasting is a crucial input for planning in almost all companies. In a recent survey of 175 companies, 92% of the respondents indicated that the forecasting was important for their company's success. Forecasts are major components of the business decision-making process. When accurate, estimates of future economic activity associated with specific courses of action can correctly guide corporate strategy in an uncertain environment; when inaccurate, they can bankrupt.

Forecasting plays an important role in every major functional area of business management. More companies probably undertake some form of forward estimation of their markets and their sales than any other aspect of their activities. The estimates produced may then be used in a variety of ways, such as in production planning, sales force planning, setting advertising appropriations, estimating cash flow, assessing the need for innovation or diversification, and in considering the general position of the company in the future. Although much of this forecasting is very good, some of it is of doubtful value. In marketing, forecasting is doubly important; not only does it have a central role in marketing itself, but marketing-developed forecasts play a key role in the planning of production, finance, and other corporate activities.

Forecasting techniques range from simple to complex. All are designed to produce accurate, unbiased estimates of future activity in the presence of uncertainty. Applications of forecasting techniques can be improved as the forecaster gains experience and sophistication; however, there is always a risk that the forecaster's expectations and hopes, among other things, may introduce bias and error. Forecasting of new, complex and rapidly changing high-technology products is particularly difficult because of limited experience and greater than usual number of unknowns.

WHAT YOU SHOULD KNOW ABOUT FORECASTING

Here are some of the things which you should know about forecasting:

1. ACCURACY OF FORECASTS: Forecasts are almost always wrong. The only real question is, how much? Why then should one forecast bad numbers? A forecast is better than no forecast. In most businesses, a certain amount of error can be tolerated. This is called acceptable error, which varies from company to company, industry to industry. The acceptable error depends on many factors including reaction time, size of company, and cost of an error to a company.

2. TIME HORIZONS OF FORECASTING: The longer the time horizon of the forecasts, the greater the chance that established patterns and relationships will change, thereby invalidating forecasts. …

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