4 Characteristics of a Forecast
It is always going to be wrong, always will be, we must learn to live with it.
Forecasts are more accurate as we aggregate up into groups or product families.
Forecasts are more accurate the closer they are to the current period, so the importance of reducing lead-times is evident here.
A forecast should never be a single figure; it should be a number plus or minus the expected error, or a maximum and minimum figure.
We need to gain a feeling for the expected accuracy of the forecast. Forecasting is the wide science of prediction. Some events are very predictable, sun rise and sunset, tides, etc. Others are less predictable, such as weather forecasting and stock prices. Others are totally unpredictable such as the lottery. However, modern forecasting techniques can assist us forecasting more accurately than before for events that have some pattern to them or are being driven by some external forces.
So, business forecasting is the first step in the business planning process and a major part of the demand management process. It is the prediction of the sales of a company’s independent demand such as finished products and spare parts that are for sale. These forecasts need to be aggregated to satisfy the three basic levels of planning in a business:
Long range strategic planning process
Medium range tactical planning sales and operations planning process
The short-term master production scheduling operational planning process
Strategic planning is predicting the overall market and direction of the economy over the next three to five years. It provides a plan for those things that take a long time to change such as major plant expansions and new product introductions. Forecasts are usually in monetary terms and are reviewed annually.
Sales and Operations Planning is concerned with manufacturing activity over the next year or two. Forecasts are generally made for groups of items centred on manufacturing facilities or production lines. The purpose is to determine when the company needs to significantly change its capacity. These forecasts are reviewed monthly.
Master Production Scheduling is concerned with manufacturing activity for the next four to six months, or the planning horizon based on the cumulative lead time to buy raw materials and manufacture the product. Detailed forecasts need to be made for each individual finished product. The purpose is to be able to use this master schedule to calculate, using BOMs and MRP, raw material and component requirements out into the future.
The important thing to remember is that the three forecasts above need to be built from the same data in order for them to support each other.
CFPIM, CSCP, SCOR-P, CPF, CS&OP, PLS, CDDP, CSCA, CDDL, CLTD, DDPP, DDLP, AEF, CSSC, CPIA Chief Executive Officer at Kent Outsourcing Services
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