In production and operations management forecasting is vital as it facilitates proper material management, therefore, its importance cannot be overlooked in an organization. Forecast is a statement about the future value of a variable of interest such as demand (Stevenson 74). It is a practice that uses past figures to estimate the future quantities that an organization requires to sustain production.
Forecasts in Operations Management
Forecasts are made with time horizons in mind and there are three levels of forecasting. Short term forecast, which ranges between one to three months, is used to project demand and stock levels for routine and tactical purposes such as production planning. Medium-term forecast runs for a period of not more than one year and is required for budgeting and allocation of resources needed to acquire stock. Long-term forecast runs for three or more years depending on the industry and is essential for strategic decision-making and planning.
Operations management is faced with the need to match demand and supply. Forecasting assists production managers to match the supply and demand needs of the organization. The purpose of operations management cannot be overlooked as the right fit between supply and demands eliminates scarcities. Forecasting is all-encompassing as it directly affects all the activities and decisions in all departments in an organization such as Accounting, Human Resource, Marketing, and Production. Forecasts are the basis for sales, budgeting, inventory, planning capacity and production, personnel and purchasing (Stevenson 74). Forecasting is part and parcel of all levels of management in an organization and therefore ensures that there is synergy between all departments.
Techniques used in forecasting tend to affect the cost and accuracy levels. Therefore, it implies that organizations need to choose the forecasting technique wisely. Qualitative and quantitative techniques constitute the two basic categories of forecasting techniques. Qualitative techniques depend on experience, expertise and judgment to formulate forecasts, while quantitative techniques rely on the use of past data to formulate forecasts.
Examples of qualitative techniques for forecasting include sale person opinion, the Delphi method and the expectation of the consumer. Among the quantitative techniques for forecasting are naive approach, moving averages method, the exponential smoothing method and time series.
Forecasting provides numerous advantages to an organization. First and foremost, forecasting is a key tool in stock control. There is minimization in shortages as there is a match between demand and supply in an organization. This ensures a continuous flow in the production process, which minimizes cost and saves time in the production cycle. Moreover, it leads to customer satisfaction as the lead-time is reduced. Forecasting also facilitates decision-making.
Forecasts are likely to be inaccurate because of the notion that what has occurred in the past will continue to persist in the future. This can pose a threat because in most cases this is not true. Forecasts can be expensive because data collection is a costly exercise. Besides, qualitative forecasting techniques are subjective and therefore they can be biased (Bass par.3).
In conclusion, forecasting serves a great purpose in an organization, all the more so in the production and operations as it plays an important role in ensuring efficient stock control. It goes without saying that forecasting provides limitless advantages in an organization. This means that its usefulness should not be overlooked and organizations should utilize it to the maximum.
Bass, Brian. Advantages and Disadvantages of Forecasting Methodsof Production and Operations Management. n.d. Web. 2014.
Stevenson, William. Operations Management. 8th ed. 2005. McGraw-Hill: New York. Print.