Forecasting is central to the decision making process in an organization (Armstrong, 1988). Different forecasting methods such as econometric modelling can help shape a firm’s long term strategy (Naylor 1981). Accurate forecasts enable a firm to make important decisions at different stages of production, sales, promotion. (Danese, Kalchschmidt,2010). For instance, production planners can predict the level of demand in times of uncertainty. In a study conducted by Rothe, it was observed that 86% of the firms gave high importance to forecasting. However, one should be careful as forecasting can also have the opposite effect, leading to high uncertainty as seen in financial markets. This essay will evaluate the importance of forecasting to operational
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In Operations management literature, forecasting is viewed as “a distinct activity” which is integral to planning the quality of operations (Lee, Adam Jr, 1986). Forecasting is used across most companies in functional areas such as production planning, sales and budgeting, new product development and long term planning (Wisner and Stanley, 1994). Companies such as Krispy Kreme Doughnuts and Nestle optimize their operations using the monthly sales and yearly profits from the past data (Information week, 2003). The need for forecasting can be explained by the uncertainty of production process. Production managers usually need to determine the level of demand which can be expected in the future, along with the costs to estimate the optimum level of production (Goodwin et al,2009). In an analysis conducted by Denise and Kalschmidt(2010), they examined the relationship between forecasting and operational performance such as cost and delivery, it was found that “forecast based decision making” has a positive effect on cost and delivery performance. Hence forecasting can be assumed to be reliable as …show more content…
In a strategic decision making process, a manager makes use of different resources such as manpower, money to achieve organizational goals and targets (Oral, 1986). An organization’s competitiveness is optimized mainly by the objectives it sets itself such as optimizing the costs, focusing on speed, maintaining adequate quality, being reliable and flexible in its operations (Chambers et Al). This is where forecasting becomes crucial. For instance, in a manufacturing industry, oversupply in inventory would lead to additional costs because of issues such as storage and products getting outdated, which leads to a loss in sales (Thomopoulos, 2015). Managers use forecasting and forecast future customer demand to ensure adequate resource utilization and inventory management (ibid). The significance is further exemplified by companies such as Wesco investing in demand forecasting software to ensure efficient supply chain and inventory management (National Petroleum News, 2006). However, if forecasts go wrong, operations are an easy target as in the case of Boeing’s 787, where the delay in manufacturing was mainly due to poor demand forecasting but was attributed to the production department. (Higgins, Kevin,
In Operations management literature, forecasting is viewed as “a distinct activity” which is integral to planning the quality of operations (Lee, Adam Jr, 1986). Forecasting is used across most companies in functional areas such as production planning, sales and budgeting, new product development and long term planning (Wisner and Stanley, 1994). Companies such as Krispy Kreme Doughnuts and Nestle optimize their operations using the monthly sales and yearly profits from the past data (Information week, 2003). The need for forecasting can be explained by the uncertainty of production process. Production managers usually need to determine the level of demand which can be expected in the future, along with the costs to estimate the optimum level of production (Goodwin et al,2009). In an analysis conducted by Denise and Kalschmidt(2010), they examined the relationship between forecasting and operational performance such as cost and delivery, it was found that “forecast based decision making” has a positive effect on cost and delivery performance. Hence forecasting can be assumed to be reliable as …show more content…
In a strategic decision making process, a manager makes use of different resources such as manpower, money to achieve organizational goals and targets (Oral, 1986). An organization’s competitiveness is optimized mainly by the objectives it sets itself such as optimizing the costs, focusing on speed, maintaining adequate quality, being reliable and flexible in its operations (Chambers et Al). This is where forecasting becomes crucial. For instance, in a manufacturing industry, oversupply in inventory would lead to additional costs because of issues such as storage and products getting outdated, which leads to a loss in sales (Thomopoulos, 2015). Managers use forecasting and forecast future customer demand to ensure adequate resource utilization and inventory management (ibid). The significance is further exemplified by companies such as Wesco investing in demand forecasting software to ensure efficient supply chain and inventory management (National Petroleum News, 2006). However, if forecasts go wrong, operations are an easy target as in the case of Boeing’s 787, where the delay in manufacturing was mainly due to poor demand forecasting but was attributed to the production department. (Higgins, Kevin,