Since this week we are learning about forecasting so I read an article about it. Forecasting is extremely important for any business from a strategy point of view because having inventory (whether physical or product) at the right time is essential for making profits. A business must buy right amount of raw materials to produce right amount of goods for consumers. If this is not the case then either the business will not be able to serve the customer due to shortage or will have to hold extra products and incur storage costs.
Many companies do not understand the strategic importance of forecasting. Having the right resources available at the right time is essential for efficient functioning. In today’s tough business environment where businesses are trying to save costs it is needed that every penny is saved. Forecasting is one way to save costs as from forecasting only companies can guess the future demand and can manage their resource accordingly. Any mismanagement in forecasting can lead to great loss in both small and large businesses.
All large companies use forecasting when formulating their strategy because without it no decisions can be made. It is true that no one can predict the future accurately but forecasting can give a general idea about future on which present decisions can be made. Forecasting is therefore an important strategic tool for all businesses.
In the article ‘7 keys to better forecasting’ the authors have stressed the importance of forecasting and have given 7 suggestions to make better forecasting decisions (Moon, et al. 45). The article also argues that better forecasting can increase the financial health of a firm significantly (44).
The first key to better forecasting is to understand what is forecasting. The article suggests that forecasting should not be viewed as a computer program but as a management process. The second key to better forecasting is to forecast demand and then plan supply. Many firms restrict their supply forecasts to their capacity. This is not a good practice according to the article as first firms should forecast demand of the product and then plan supply.
The third key is to communicate, cooperate, and collaborate because forecasting involves input from all levels of organization. The fourth key is to not waste time on redundant activities. There are some activities that are performed by many departments and this should not happen because valuable time and effort is wasted on these activities and they do not add value to the firm.
The fifth key to better forecasting is to use tools of forecasting wisely (Moon, et al. 45). Some companies rely on qualitative tools too much and ignore quantitative tools of forecasting. A balance should be maintained between the two tools in order to predict future demand better. The sixth key is to make forecasting important by making people who are involved responsible for their decisions. The seventh and the last key to better forecasting as discussed by the article is to measure performance, feedbacks, and standards (Moon, et al. 45). All these suggestions can improve the forecasting in a firm.
Moon, M. A., Mentzer, J. T., Smith, C. D., & Garver, M. S. Seven keys to better forecasting. Business Horizons, 44–52, (1998)