Managers and Selection of Proper Forecasting Technique
The increasing complexities of the business environment together with the changing
demands and expectations, implies that every organization needs to know the future
values of their key decision variables. In virtually every decision they make,
executives today consider some kind of forecast. In any organization, managers play a
significant role in implementing Forecasting techniques. Forecasting takes the
historical data and project them into the future to predict the occurrence of uncertain
events. Forecasting serves as a self-assessment tool for the company. To handle the
increasing variety and complexity of managerial forecasting problems, many
forecasting techniques have been developed in recent years. Each has its special use,
and care must be taken to select the correct technique for a particular application.
The manager as the forecaster has a role to play in technique selection; and the better
he understands the range of forecasting possibilities, the more likely it is that a
company’s forecasting efforts will bear fruit. Sound predictions of demands and
trends are no longer luxury items, but a necessity, if managers are to cope with
seasonality, sudden changes in demand levels, and price-cutting maneuvers of the
competition, strikes, and large swings of the economy. Forecasting can help them deal
with these troubles; but it can help them more, the more they know about the general
principles of forecasting, what it can and cannot do for them currently, and which
techniques are suited to their needs of the moment.
The selection of a proper forecasting method depends on many factors. Some of
such factors are; the context of the forecast, the relevance and availability of historical
data, the degree of accuracy desirable, the time period to be forecast, the cost/ benefit
(or value) of the forecast to the company, and the time available for making the
analysis. These factors must be weighed constantly, and on a variety of levels. In
general, for example, the forecasting manager should choose a proper forecasting
technique that makes the best use of available data.
A manager forecasts by going through the reports, graphs and analyzes the pulse of
the business. It can make a huge difference between just surviving and being highly
successful in business. The future direction of the company may rest on the accuracy
of forecasting done by a manager.
The forecasting methodology emphasis on the knowledge and judgment of the
manager. This is unavoidable given the nature of the market, but it follows that
developing a good forecast is a labor-intensive process.
When an objective is set in a company, the external and internal factors have to
observed and listed by the manager. Studying cultural, political and international
environment is necessary as these factors are uncontrollable. Internal factors such
company’s internal policies and their effects on demand changes, technology changes,
sales changes also need to considered. After gathering information various forecasting
techniques which are needed are applied.
The forecast should be operationally applied. This can be done by breaking it down
on the basis of number of product lines, the type of customers, the various
management policies. The various scenarios derived earlier must be compared in light
of the operational feasibility. The idea here is to determine what is feasible and what
is profitable from total internal business environment. After studying various
feasibilities the forecast becomes really useful. After using the forecast, the forecast
errors and reasons for deviation are monitored regularly.
Managers who implement accurate sales forecasting processes realize important
benefits to company such as:
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Ability to determine the expected return on investments
The ability to plan for production and capacity
Determine the value of a business above the value of its current assets
Knowing when and how much to buy
The ability to identify the pattern or trend of sales
Enhanced cash flow
In-depth knowledge of customers and the products they order.
Credit: Managerial Economics-MGU
MBA- Knowledge Base