FORECASTING:SOME APPLICATIONS OF FORECASTING

SOME APPLICATIONS OF FORECASTING

We now will discuss some main areas in which forecasting is widely used.

Sales Forecasting

Any company engaged in selling goods needs to forecast the demand for those goods. Manufacturers need to know how much to produce. Wholesalers and retailers need to know how much to stock. Substantially underestimating demand is likely to lead to many lost sales, unhappy customers, and perhaps allowing the competition to gain the upper hand in the marketplace. On the other hand, significantly overestimating demand also is very costly due to (1) excessive inventory costs, (2) forced price reductions, (3) unneeded production or storage capacity, and (4) lost opportunities to market more profitable goods. Successful marketing and production managers understand very well the importance of obtaining good sales forecasts.

Forecasting the Need for Spare Parts

Although effective sales forecasting is a key for virtually any company, some organizations must rely on other types of forecasts as well. A prime example involves forecasts of the need for spare parts.

Many companies need to maintain an inventory of spare parts to enable them to quickly repair either their own equipment or their products sold or leased to customers. In some cases, this inventory is huge. For example, IBM’s spare-parts inventory is valued in the billions of dollars and includes many thousand different parts.

Just as for a finished-goods inventory ready for sale, effective management of a spare- parts inventory depends upon obtaining a reliable forecast of the demand for that inventory. Although the types of costs incurred by misestimating demand are somewhat different, the consequences may be no less severe for spare parts. For example, the consequence for an airline not having a spare part available on location when needed to continue fly- ing an airplane probably is at least one canceled flight.

Forecasting Production Yields

The yield of a production process refers to the percentage of the completed items that meet quality standards (perhaps after rework) and so do not need to be discarded. Particularly with high-technology products, the yield frequently is well under 100 percent.

If the forecast for the production yield is somewhat under 100 percent, the size of the production run probably should be somewhat larger than the order quantity to provide a good chance of fulfilling the order with acceptable items. (The difference between the run size and the order quantity is referred to as the reject allowance.) If an expensive setup is required for each production run, or if there is only time for one production run, the reject allowance may need to be quite large. However, an overly large value should be avoided to prevent excessive production costs.

Obtaining a reliable forecast of production yield is essential for choosing an appropriate value of the reject allowance.

Forecasting Economic Trends

With the possible exception of sales forecasting, the most extensive forecasting effort is devoted to forecasting economic trends on a regional, national, or even international level. How much will the nation’s gross domestic product grow next quarter? Next year? What is the forecast for the rate of inflation? The unemployment rate? The balance of trade?

Statistical models to forecast economic trends (commonly called econometric models) have been developed in a number of governmental agencies, university research centers, large corporations, and consulting firms, both in the United States and elsewhere. Using historical data to project ahead, these econometric models typically consider a very large number of factors that help drive the economy. Some models include hundreds of variables and equations. However, except for their size and scope, these models resemble some of the statistical forecasting methods used by businesses for sales forecasting, etc.

These econometric models can be very influential in determining governmental poli- cies. For example, the forecasts provided by the U.S. Congressional Budget Office strongly guide Congress in developing the federal budgets. These forecasts also help businesses in assessing the general economic outlook.

Forecasting Staffing Needs

One of the major trends in the American economy is a shifting emphasis from manufacturing to services. More and more of our manufactured goods are being produced outside the country (where labor is cheaper) and then imported. At the same time, an increasing number of American business firms are specializing in providing a service of some kind (e.g., travel, tourism, entertainment, legal aid, health services, financial, educational, design, maintenance, etc.). For such a company, forecasting “sales” becomes forecasting the demand for services, which then translates into forecasting staffing needs to provide those services.

For example, one of the fastest-growing service industries in the United States today is call centers. A call center receives telephone calls from the general public requesting a particular type of service. Depending on the center, the service might be providing technical assistance over the phone, or making a travel reservation, or filling a telephone or- der for goods, or booking services to be performed later, etc. There now are several hundred thousand call centers in the United States.

As with any service organization, an erroneous forecast of staffing requirements for a call center has serious consequences. Providing too few agents to answer the telephone leads to unhappy customers, lost calls, and perhaps lost business. Too many agents cause excessive personnel costs.

Other

All five categories of forecasting applications discussed in this section use the types of forecasting methods presented in the subsequent sections. There also are other important categories (including forecasting weather, the stock market, and prospects for new products before market testing) that use specialized techniques that are not discussed here.