Introduction
An organization operates in uncertain environments. Both the internal as well as the external environments pose challenges that have the potential to negatively impact on business operations. Internal risks such as technology failure and labor unrest coupled with external risks including competitor operations, unfavorable legal and political laws, recession, inflation among others, are constantly operating against the firm objectives. As such, decision-making process happens under risks and uncertainties. Proper planning by the organization will enable it to minimize the adverse effects that may result from such environments. If an organization can be able to determine the future demand for its products and services, it will be better placed to lessen the potential dangers to its business (Daft & Vershinina, 2010). The demand forecast is an important business process that involves a systematic process through which the future demand for a company’s products or services is anticipated given a specific set of uncontrollable variables.
Matching Supply and Demand
Organizations quite often find themselves facing a difficult time in trying to match the demand and supply for their products and services. Those that can successfully do this are well-positioned and move forward smoothly (Sharma, 2009). However, Sharma acknowledges that even for those firms that can manage this balancing act still find it difficult to maintain because it may be time-consuming and takes up a lot of labor costs. Matching the two means that the company operates in demand driven transformations and this entails various stages of involvement. It is important for firms to determine the prevailing market demand for their products and services before they can know the right quantities to supply. Market demand is an external force that the organization cannot control. It can, however, control its supply. Underestimating the market demand means that the company would not be able to meet consumer needs leading to dissatisfaction as well as increased ordering and set up costs. Overestimating it, on the other hand, will lead to surpluses in inventories which will increase the stock holding costs. In both instances, the organization will incur unnecessary costs which would otherwise be eliminated through proper demand forecasting followed by the right supply quantities. Currently, most companies employ information technology to be able to devise the best symmetry. They can choose different options from the available information technology providers to suit their business needs. Matching demand and supply ensure that the company can successfully control its operating costs within the expected levels (2009).
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The Purpose of Forecasting
According to Greenwood (2002), demand forecasting is a vital element in business operations. Successful forecasting will enable the business management to develop and later enhance the strategic plans through the accumulation of the knowledge about the marketplace. The information provided by the forecasts aids in the effective management of all spheres of the business. Through this process, the business can set its sales target, maintain the right inventory levels, and determine the right labor requirements as well as other operating expenses. Once the market demand is established, the company will use it as the yardstick for setting the optimum supply that will be able to meet the market requirements without leaving costly surpluses. As such, the company will be able to set a realistic sales target that is both competitive and attainable. It will thus have the ability to know the amount of revenue that it expects to achieve within a specific operation period.
When the organization knows what the market requires quantities, it will be in a better position to determine the right quantities of raw materials that are needed for production (Fisk & John, 2014). It will make the right purchases in consideration of the opening stock to have the appropriate available stock in its inventory. This will ensure that the remaining closing stock is at the optimum level that does not require extra holding costs and is sufficient enough to eliminate unnecessary ordering costs. Since the company knows the specific quantities to supply to the market, it will be able to determine how much it needs to produce in addition to the available stock at the beginning of a specific operation period. It will thus procure the right amount of labor that is required for the particular product, without incurring unnecessary labor costs. The knowledge of direct materials and labor needed for production will give proper guidance as to the right amount of direct expenses required for the same production (Hansen & Guan, 2009). After the company establishes the right direct expenses, it will be able to control its production costs to the minimum levels and avoid wastes. With the knowledge about expected sales and direct expenses, the company will be in a position to forecast its gross profit.
Important Aspects of Forecasting
Sales forecasting involves certain important business aspects that include the uses as well as the sources of business capital (Mentzer & Moon, 2007). Further, according to Mentzer & Moon (2007), among the uses of capital include production, purchases, human resources, research and development and marketing. The sources of business capital include the options that are available for the company to help in business operations which entail the financing element. Production forecast consists of all the elements that lead to complete production which includes forecasts for the value of the opening stock of raw materials and work-in-progress, purchases for raw materials, direct labor costs and direct expenses as well as other indirect expenses that can be allocated for the specific production. After determining the total of all these expenses, the cost of the closing stock for raw materials as well as work-in-progress is deducted to establish the actual cost of production for the period.
Purchases forecasts entail the value of raw materials that the company anticipates to buy for the specific production period after considering what is available for production and how much is expected to be provided for the closing stock of raw materials and work-in-progress. Human resources forecasts refer to the expected labor costs that the company estimates to spend in a specific production period. Research and development forecasts involve the expenses that the organization plans on undertaking for research and development initiatives for a specific product. Marketing forecasts entail the total marketing costs for the products and services that the company anticipates to incur within a specific production period. Finance forecasts entail all the sources of finance that the organization expects to use for its business operations for a specific financial period (Aswathappa, 2005).
Classification of Forecasting Based on Periods
Gilliland & Tashman (2015) points out different types of forecasting methods. One type is based on periods, which consists of long-range, medium range and short range forecasting. Business organizations require all the three methods depending on what it is being applied on. Short-range forecasts are those that involve short periods of time frames, usually within one month and are used for routine operations such as personnel scheduling, production as well as distribution. Demand forecasts are required as part of the scheduling process. Medium-range forecasts involve operations that take up more than one month but less than one year to complete. They are relevant in determining the future resource requirements of the company so that the right quantities of raw materials can be purchased, for hiring personnel, and buying of machinery and equipment among others. Long-range forecasting is concerned about those projects that take more than a year to complete. They involve strategic organizational plans. Such decisions involve the analysis of both the internal as well as external business environment to take up the available market opportunities while avoiding the prevailing threats in the face of current business strengths and weaknesses.
Forecasting Techniques
Managers engage in forecasts for budgeting for future operations. There are two approaches to forecasting, and they include qualitative and quantitative techniques. The qualitative approach of forecasting makes use of judgment and opinion and involves four main types which are the Delphi technique, executive opinions, consumer surveys and sales force polling. This approach is useful for short-term forecasts and can also be employed to enhance the quantitative techniques. The quantitative approach employs the use of historical data as well as causal forecasts to determine the future variables. Historical data can be subjected to different methods to be meaningful for decision-making purposes. These methods include the moving average, naïve methods, trend analysis, exponential smoothing and decomposition of time series. Causal forecasts can be grouped into simple regression, multiple regression, and econometric modeling. Quantitative techniques are more useful for medium and long-range forecasts. The choice of the forecasting method is mostly based on the life cycle stage at which the product has reached, and the nature of the firm or industry within which the organization is operating (Information Resources Management Association, 2018).
Conclusion
The business environment is constantly changing, and companies must be able to adjust to such dynamics to stay relevant. For successful adjustments, the management should be able to predict what is likely to happen within the marketplace. Accurate forecasts will enable a business to be ready for inevitable changes that may happen within the market. These forecasts also need to be continuously reviewed concerning the changing market needs to enable a sound decision-making process. Organizations need to match their supply with the market demand to create value in their supply chain management. Sales forecast enable the firm to set realistic sales targets, hold the right inventory levels and determine the right labor requirements together with other expenses. It involves both the uses and sources of business capital. One way through which forecasts can be classified is based on time duration, giving rise to short-range, medium-range and long-range forecasts. Quantitative and qualitative approaches are the two techniques for sales forecasting, and an organization can choose between the two depending on the approach that best suits its needs as well as the product life cycle.
References
Aswathappa, K. (2005). Human resource and personnel management: Text and cases . New Delhi: Tata McGraw-Hill.
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Gilliland, M., Sglavo, U., & Tashman, L. (2015 ). Business forecasting: Practical problems and solutions . John Wiley & Sons, Inc.
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Hansen, D. R., Mowen, M. M., & Guan, L. (2009). Cost management: Accounting and control . Mason, Ohio: South-Western.
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Sharma, R. K. (2009). Demand management: Supply constraints and inflation . New Delhi: Global India Publications.
