Why Do We Forecast And How Can We Improve Forecasting?
There are many reasons we may want to carry out forecasting. Some are obvious, while some are not so easy to identify.
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We may want to know more about our product life cycle. Generally, a product life cycle graph should show us growth in volume up to a peak. Sometimes this peak is short lived, so we can identify this as the “novelty” curve, which may decline into obscurity. The scale of the lines and curves will vary from product to service, but the curve is appliciable to most products or services. The most important parts of the product curve that we should be able to forecast are the volume and duration of the product cycle, which is also the most difficult to forecast.
Forecasting For Capital Investment
Forecasting gives you a strong basis for input into long term decisions such as capital investment, so that you can plan for what the demand will be and when things need to be implemented.
The business cycle could be defined as what comes with economic prosperity and decline. A business cycle can simply be defined in a sense of a period of slow or negative growth followed by the next period of rapid growth. “Boom and bust” requires a forecasting ability so that you can plan for inventory and capacity. It is vital that you can inentify the next upturn or downturn accurately so that you do not end up with excess stock or resources, or even end up with a shortfall in stock and resources.
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Forecasting For Supply Chain Lead Times
Identifying supply chain lead times and consumer lead times is hugely important as when there is uncertain demand and the supply chain lead-time is greater than the customer required lead-time, you may have to order or provide for stock or resources in anticipation of an order. Forecasting is therefore essential in this case.
A major problem for your business ca be when customers want things at a faster rate than your capacity can cope with. You should have the ability to forecast peak demand and your average capacity in advance, so that you can cope with the demand and make the sales when you are required to do so. If you want to give high service to your clients, then you need to be able to match your peak demand with peak capacity.
If your forecasting is not effective then it can have major implications for your business. An over or underreaction to a trend can create financial losses, to begin with. Understimation can cause lost sales, dissatisfied customers, and increased costs due to insufficient resources and epidited freight costs. Over estimating can leave you with excess stock, under utilized resources, and a restricted cash flow.
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