Question

It has been stated a number of times that the success of firms today often relies on the ability to forecast appropriately. How, and why, do companies use forecasts? For what type of business decisions do you think forecasting is useful? Give examples of how forecasting is used in organizations to which you belong, or how forecasting might help your organization in the future.

This unit we are studying time series forecasting, which is an example of a quantitative forecasting approach. What other forecasting approaches or methods have been developed, and in what situations might these methods be used?

Answer 1

There are various reason why companies use forecasting. The underlying reason however, is to efficiently manage resources while optimising (maximising) the profit for the company. We see companies use forecasting demands so that they can plan the production process. We also see companies forecast sales so that they can plan HR requirements. However, the key reason is to maximise profit while being efficient in their operation.

When it comes to the question of being useful, forecasting is never 100% accurate and there will always be flaws. However if all factors remain constant, forecasting can be a useful tool to predict the demand for a product in the market. It can also be useful in economic factors such as inflation, exchange rate, etc.

In our company, we tend to forecast the possible demand for our product and plan the employee requirement accordingly every year. I work in the HR department so I see that.

When it comes to category, there are two broad categories of forecasting. They are qualitative and quantitative. Time series forecast is a quantitative approach that uses trend or linear regression formulas. Similarly there are other forecasting methods such as moving average, weighted average, seasonal indexing, exponential smoothing, double exponential smoothing, trend adjusted seasonal indexing, etc.

similarly there are various qualitative methods as well. It includes the likes of Naive method, Delphi method, expert opinion, etc.