Introduction To The Role Of Forecasting
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The forecasting process is extremely important for most businesses. In many cases the forecasting activity drives supply chain processes including the procurement of goods and corresponding inventory control. It can be a challenging and complex activity depending on the business environment and in many cases is analogous to crystal ball gazing albeit one in which you are armed with some level of information.
The key output required from forecasting is determining how much of a product will be bought by customers (or consumed by internal customers). Overly optimistic forecasts may result in the acquisition of too much raw materials (therefore wasting valuable capital). Where the forecast is too low and does not match demand then the company may not meet customer demand and may either lose customers or fail to meet agreed service levels.
What you create when you carry out a forecast
A forecast will typically deliver the anticipated demand profile over a number of months/years for the top level product/part– in many environments this in turn will drive procurement activity that will utilize known lead times to order to procure material in time to meet the the requirements of the forecast.
While the actual forecasting processes may vary from company to company the key concepts are fairly common and are utilized by most businesses.
Statistical Forecasts
Many organizations choose to utilize specialist forecasting software that commonly take data from the ERP system and extrapolate it into a future demand profile. For many organizations this data analysis is supported by what is known by the organization (i.e. market intelligence) to tune the demand profile into what is thought to be realistic.
Data integrity is obviously key for organizations following this approach and the benefits include that the organization is basing its forecast on non-subjective transactional data (often that which is happening in real time) the forecast is configured in such a way that the forecasting solution can deliver a number of outputs or models depending on pre-configured criteria.
Non Statistical Forecasts
There are other forecasts that are often grouped together as non-statistical forecasts. These are forecasts that have been devised from quantities that are determined by production planners. The forecast is usually based on current demand alone.
The Importance Of Forecasts
Forecasts are vital if the supply chain is to be kept stable. If the supply chain becomes vulnerable to stock outs or if there are no accurate forecasts made, then the manufacturing function can be severely impacted putting strain on the supply chain and supplier lead times as the result of inaccurate forecasts are attempted to be mitigated.