28 Nov 2022


Forecasting and Inventory Management in Operations Management

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Forecasting is an art of predicting future trends. In operations management, forecasting can be described as a tool used by managers to enable them make budgetary conclusions, arrive at realizable business goals and objectives, design a business plan and estimate prospective business growth over a pre-established period of time (Hyndman & Athanosopoulos, 2018). In operations management, forecasting can be intended for the short term, medium term and long term business operations. 

Steps involved in Formulation of a Forecast 

The process of formulation of a forecast can be summarized into five stages (Hyndman & Athanosopoulos, 2018). These steps are: 

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Description of problem. This step requires an understanding of the intended use of the forecast, who the forecast is intended for, and comprehension of how appropriate the forecasting function will be for the institution needing it. It is therefore important that one defines the above problems first before making any advancements in developing a forecast. 

Gathering of relevant information. Devising of forecasts for purposes of operations management obliges that one has to collect both statistical data and also the proficiency of the persons involved in the collection of the data. Usually, old data is not of great significance when it comes to designing of operation management forecasts. 

Preliminary analysis of data or information collected. This step calls for establishment of consistency in the data or information collected in the step above. Uniformity in data or information collected can be verified through graphing of data and comparison of findings respectively. 

Selection and fitting of models. The best models are arrived at by choosing data or information that demonstrate consistency patterns. The strength of relationship of variables in question is also of significant value when making decisions on the best models to choose. Fitting or plotting of the models then follows. 

Employment and evaluation of the forecasting model. This is the final stage in formulation of an operations forecast. It follows that after selection and estimation of parameters of a model, the model can then be used to make assumptions. Evaluation of the performance of a forecast can be made. This possible for forecasts whose intended purpose is long term. Assessment of the functionality of a forecast model is done by comparing data over the forecast period with what was indicated in the forecast model. 

Methods of Forecasting 

One method of forecasting that is of great significance in my career is the quantitative approach to forecasting. The quantitative model of forecasting involves making predictions or assumptions about the future bearing in mind that these future patterns are a function of the past data or trends (Dwyer, Gill & Seetaram, 2012). This method of forecasting is of significant value when past numerical data about a variable can be retrieved (Dwyer, Gill & Seetaram, 2012). In addition, this method of forecasting is only used when it is reasonable to make assumptions that various patterns evidenced in the past numerical data are projected to persist into the future (Dwyer, Gill & Seetaram, 2012). This method of prediction of future trends is however only efficiently applicable to short and medium range decisions. 

Applications of the Quantitative Method to Forecasting 

The quantitative model of forecasting can be applied in the real-world business setting in a number of ways. First, this approach to forecasting can be used in the estimation of future demands of a product by consumers during a particular season of the year (Šečkute & Pabedinskaite, 2003). An example is the demand for umbrellas during the rainy season. To achieve this, one has to revisit the rate of demand of umbrellas during the past rainy seasons and make assumptions on the likelihood of the trend continuing into the future. After establishment of past trends and ensuring that the trend is likely to recur into the next rainy season, an umbrella manufacturer can then go ahead and manufacture more umbrellas to ensure that he has enough umbrellas to sell when the rains come. The quantitative approach can also be used by the tourism ministry to estimate the estimated number of tourists the country expects during a given season of the year, for example, during summer (Šečkute & Pabedinskaite, 2003). Estimation of these figures will enable the tourism sector to prepare sufficiently in terms of ensuring that there is enough facilities before summer and also ensuring that there will be adequate security before the tourists arrive 

Inventory Management 

Inventory management in business operations denotes supervision of stocks and other non-capitalized chattels within a firm (Wild, 2017). Inventory management is also a general term used to symbolize controlling use of firm possessions, overseeing how they are utilized as well as ordering how the resources are used (Wild, 207). 

Essentials of a Good Inventory Management System 

For an inventory management system to be referred to as good and effective, it must meet the following requirements. 

Must have item descriptions. All items an organization possesses should have descriptions that are well defined and unique to themselves (Bauer et al., 2012). Sometimes, it is necessary to indicate item locations and quantity within the inventory. 

A good inventory system should have alternative numbers assigned to various items at an organization’s disposal (Bauer et al., 2012). These numbers could be used to uniquely identify and track the items. These cords are of specific importance when filling orders, making transactions or filtering reports. 

A functional inventory should also indicate units of measurements (Bauer et al., 2012). These units of measurement may be in form of pieces, bags, pounds (lbs.) or any other unit of measurement. 

Should have a well-defined starting count (Bauer et al., 2012). When filling a new inventory, it is appropriate to establish the exact count of stocks available. 

Should have a software system which is able to track down any inventory activities (Bauer et al., 2012). A good software system in inventory management leads to ease of access of items, offers insight into all inventory activities and facilitates record keeping. 

Training on the inventory system is essential (Bauer et al., 2012). It is important to note that it is necessary for people working with any given stock know how to handle them, know what exactly they are to do with the stock they receive, what stocks are reserved for 

future use and who should be responsible for conducting certain transactions. 

Applications of Inventory Management in Real-World Business Setting 

Inventory management is applicable to various occasions in real-world business setting. Inventory management can be useful in the determination of stock control within a business organization (Iwu, et al., 2014). Stock control is aimed at avoiding either understocking or overstocking. Overstocking for example could lead to a business firm incurring losses in terms of storage expenses. Inventory management could also lead to increased business efficiency and increased productivity (Caro, 2010). This is because less time is then required to locate items within a warehouse and this translates into timely offer of services to clienteles. 

Importance of Forecasting and Inventory Management in Operations Management 

Forecasting and inventory management are both crucial in operations management. Forecasting for instance plays a key role in planning of effective operations and courses of actions in modern management (Hall, Jones, Raffo & Anderton, 2008). Forecasting in operations management is also pivotal in the realization of economic development in firms (Kulendran & Witt, 2003) . Additionally, forecasting in operations management prepares firms for any possible future competition. Competition forecasts involve predictions of possible marketing strategies competitors are likely to use. Social forecasts are also central to determination of probable changes in consumer tastes, attitudes and demands (Kulendran & Witt, 2003). Knowledge of these three factors could enable a firm to be at a good position to make the appropriate amendments where necessary so as to meet the shifts in consumer preferences. 

The roles played by inventory management in operations management cannot also be underestimated. An inventory management system helps with business organization (Wild, 2017). An inventory system helps make business operations of organizations more systemized through provision of records of all the assets a firm possesses and also those products that are quickly selling fast and those that are moving slowly. Inventory management also helps with transparency and tracking in operations management (Wild, 2017). Constant tracking of all assets a firm has is vital in determination of operational strengths and weaknesses. Apart from assisting in establishment of sectors where a business tends to perform in and those it does not do so well at, inventories are also focal in ascertaining the worth of a business entity. Lastly, inventory management can help improve purveyor relationships (Wild, 2017). This is due to the fact that an inventory management system provides seamless tracking of all items hence both the business organization and its vendors get to familiarize themselves with the ordering needs. 


Forecasting and inventory management are two weighty tools in operations management. An example of operations management is a business. Lack of proper forecasting of likely shifts in business operations could lead to business failure since businesses blossom on being well planned for. All business owners should therefore accurately plan for the future outlook of their businesses. Inadequate inventory management could also lead to business insolvency since one is likely to have superfluous inventory taking up storage space; hence, one may end up incurring unnecessary storage charges. Excess inventory could also trigger profit losses. Profit losses are suffered when products expire, damaged or when products go out of season. To avoid encountering these setbacks in operations management, it is therefore fundamental that managers come up with adequate and reliable forecasts and also adopt functional inventory management systems. 


Bauer, G.D., et al. (2012). Inventory management system. Retrieved from 


Dwyer, L., Gill, A., & Seetaran, N. (2012). Handbook of research methods in tourism: 

Quantitative and qualitative approaches . Cheltenham, UK: Edward Elgar Publishing. 

Hall, D., Jones, R., Raffo, C., & Anderton, A. (2008). Business Studies. Lancashire, UK: 

Causeway Press Ltd. 

Hyndman, J.R., & Athanasopoulos, G. (2018 ). Forecasting: principles and practice. Melbourne, 

Australia: OTexts. 

Iwu, H.C., Ogbonna J.C., Opara, J., & Onuma, K.G. (2014). Application of inventory model in 

determining stock control in an organization . American Journal of Applied 

Mathematics and Statistics, 2 (5), 307-317. 

Kulendran, N., & Witt, S.F. (2003). Forecasting the demand for international business tourism. 

Journal of Travel Research, 41 (3), 265. 

Šečkute, L., & Pabedinskaite, A. (2003). Application of forecasting methods in business . Journal 

of Business Economics and Management, 4 (2), 144-157. 

DOI: https://doi.org/10.1080/16111699.2003.9636048 

Wild, T. (2017). Best practice in inventory management . London, UK: Routledge. 

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