Operations and Supply Chain Management The Core

46 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
FORECASTING IN OPERATIONS AND
SUPPLY CHAIN MANAGEMENT
LO3–1 Understand
how forecasting is
essential to supply
chain planning.
Strategic forecasts
Medium- and longterm
forecasts used
for decisions related
to strategy and
estimating aggregate
demand.
Tactical forecasts
Short-term forecasts
used as input for
making day-to-day
decisions related to
meeting demand.
Forecasts are vital to every business organization and for every significant management
decision. Forecasting is the basis of corporate planning and control. In the functional areas
of finance and accounting, forecasts provide the basis for budgetary planning and cost
control. Marketing relies on sales forecasting to plan new products, compensate sales personnel,
and make other key decisions. Production and operations personnel use forecasts to
make periodic decisions involving supplier selection, process selection, capacity planning,
and facility layout, as well as for continual decisions about purchasing, production planning,
scheduling, and inventory.
In considering what forecasting approach to use, it is important to consider the purpose
of the forecast. Some forecasts are for very high-level demand analysis. What do we expect
the demand to be for a group of products over the next year, for example? Some forecasts are
used to help set the strategy of how, in an aggregate sense, we will meet demand. We will
call these strategic forecasts. Relative to the material in the book, strategic forecasts are
most appropriate when making decisions related to overall strategy (Chapter 2), capacity
(Chapter 4), manufacturing process design (Chapter 6), service process design (Chapter 7),
sourcing (Chapter 13), location and distribution design (Chapter 14), and in aggregate
operations planning (Chapter 8). These all involve medium- and long-term decisions that
relate to how demand will be met strategically.
Forecasts are also needed to determine how a firm operates processes on a day-to-day
basis. For example, when should the inventory for an item be replenished, or how much
production should we schedule for an item next week? These are tactical forecasts where
the goal is to estimate demand in the short term—a few weeks or months. These forecasts
are important to ensure that in the short term we are able to meet customer lead-time
expectations and other criteria related to the availability of our products and services.
FORECASTING IS CRITICAL
IN DETERMINING HOW MUCH
INVENTORY TO KEEP TO MEET
CUSTOMER NEEDS.
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