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Forecasting Part 1

Objectives of Forecasting

The objective of this post is to impart some light on the uses and importance of forecasting and to get you acquainted with various forecasting techniques.

What is Forecasting?

Forecasting is a technique that uses historical data as inputs to make informed estimates that are predictive in determining the direction of future trends.

And also to know how these techniques are used in an organization’s decision making process.

Objectives of demand forecasting

Nature of Forecast

A forecast is an estimate of an event which will happen in future – be it, demand of a product, rainfall at a particular place, population of a country, or growth of a technology.

It is estimated based on the past data related to a particular event and hence it is not a deterministic quantity.

In any industrial enterprise, forecasting is the first level decision activity before consolidating other decision problems like, materials planning, scheduling, type of production system.

Forecasting provides a basis for co-ordination of plans for activities in various units of a company.

All the functional managers in any organization will base their decision on the forecast value. So, it provides vital information for that organization.

Classification of Forecasts

  1. Technology forecasts
  2. Economic forecasts
  3. Demand forecasts

1. Technology Forecast

Technology is a combination of hardware and software. Hardware is any physical product while software is the know-how, technique or procedure.

Technology forecast deals with certain characteristics like level of technical performance, rate of technological advances.

It is a prediction of the future characteristics of useful machines, products, process, procedures or techniques.

TIFACTechnology Information Forecasting and Assessment Council is an autonomous organization set up in 1988 under the Department of Science & Technology. In 1993, TIFAC embarked upon the major task of formulating a Technology Vision for the country in various emerging technology areas.

2. Economic Forecast

Government agencies and other organizations involve in collecting data and prediction of estimate on the general business environment.

Forecasting techniques
Economic forecast

This involves the application of statistical models utilizing variables sometimes called indicators. Some of the most well-known economic indicators include inflation and interest rates, GDP growth/decline, retail sales and unemployment rates.

This is used to predict future tax revenues, level of business growth, level of employment, level of inflation etc. Also, these will be useful to business circles to plan their future activities based on the level of business growth.

3. Demand Forecast

This gives the expected level of demand for goods or services. This is the basic input for business planning and control.

Hence, the decisions for all the functions of any corporate house are influenced by demand forecast.

The process of demand forecasting.

Factors Affecting Demand Forecast

  • Business cycle
  • Random variation
  • Customer’s plan
  • Product’s life cycle
  • Competitor’s efforts and prices
  • Customer’s confidence and attitude
  • Quality
  • Credit policy
  • Design of goods or services
  • Reputation for service
  • Sales effort
  • Advertising