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Forecasting Methods

It is beyond the scope and intent of this paper to discuss the merits of various forecasting techniques. However, it is appropriate to mention the selection criteria which should be taken into account. These selection criteria are:

— Short term (0-3 month)
— Medium term (3 month - 2yr.)
— Long term (2yr. +)
• DATA REQUIRED (and available)
— To develop applications
— To prepare forecast

There is no "perfect" forecasting method. The key to optimizing the impact of forecasting on the preparation and maintenance of the manufacturing plan is to have realistic expectations of what is possible and how to get there. The search for the magic solution will be frustrating, disappointing and expensive.
Overreliance on Quantitative Methods

The preparation of the Manufacturing Plan is a managerial function. This function cannot be relegated to the com­puter. The computer cannot be held either responsible or accountable for the validity of the data. The accountability must rest with the Sales & Operations Planning team. The computer-based techniques are based on extrapolation of historical data into the future. The S&OP team, chaired by the responsible general manager can integrate the knowl­edge of changes in anticipated demand and customer expectations. The team can be held accountable for the decisions made to translate the Marketing Forecast into the optimal Manufacturing Plan.

The Cost of Forecast Error

Given that the forecast will be wrong (or lucky) why bother? The driving issue is survival of the business. The business will not survive when the forecast error and the resulting costs are more than the business can tolerate or when these errors are significantly greater than those sustained by the competition. The costs are caused by high forecasts which result in high inventory and possibly obsolete products and parts and excess capacity. The costs can be caused by low forecasts which result in the expense of fire fighting, unhappy or lost customers and erosion of margin needed to invest in improvements. The actual numbers will vary from business to business and over time. Recognition of these costs will tend to give a basis for determining the amount of investment that is justified, if not essential, to be made in improving the forecast and the Manufacturing Plan. This investment may well justify a program to improve forecast accuracy by reducing lead time, simplify­ing product variety and improving manufacturing's ability to respond to changes in demand level and mix. This calculation or estimate of the cost of forecast error may be a very worthwhile exercise.


Forecasting is a means and not an end. It is a tool and not a product. The following, probably not said about forecast­ing, nonetheless seems to apply to forecasting:

This is not the beginning nor the end; nor is it the beginning of the end; it is only the end of the beginning.
—Winston Churchill

The impact of the Marketing Forecast on the Manufactur­ing Plan will be a function of acceptance by the manufac­turing people. The level of acceptance will be a function of their understanding of, and participation in, the "Why, What, and How" we forecast. In the well integrated organization, forecasting, like sales and operations plan­ning, are total company activities involving people who believe that:



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