Purpose of short term forecasts

Forecasting should be an integral part of the decision-making activities of management, as it can play an important role in many areas of a company. Short-term forecasts are needed for scheduling of personnel, production and transportation. As part of the scheduling process, forecasts of demand are often also required.

Short-term forecasts are usually made for tactical reasons that include production planning and control, short-term cash requirements and adjustments that need to be made for seasonal sales fluctuations. This latter factor can be very important for production, whereas the general trend may be of less consequence.

Due to scenario of economic stability, the companies has been worried about investing in planning their operations, making use, mainly, of forecasting methods in order to become more competitive in the market. In the case of food industry, the seasonal and the short perishability factors are a limitation to the maintenance of stocks, requiring a forecast with a high accuracy level.

Short-term forecasting is intended only a few time periods, days, weeks or months into the future and is divided more precisely based on real demand of a certain product. If company is selling products from a stock, the short term sales forecast comprises the stock fulfillment in order to maintain availability.
Purpose of short term forecasts

Make-to-stock productions

The classical production strategies are make-to-stock, which determine the planning to great extent. In make-to-stock productions there is no direct connection between a customer’s order and a manufacturing order.

Generally a manufacturing order does not cover the requirements of the customer order that triggers it; rather the customer’s order is filled from existing stock.

The replenishment process at the production facility of an make-to-stock system is governed by a replenishment policy, which typically sets the size of the replenishment order so as to attain a prescribed inventory position, defined as the inventory level minus the backorder level and plus all the pending order level en route to the inventory facility.

In a typical make-to-stock environment planning is triggered only by independent requirements and therefore demand planning has a great significant.

Forecast should be considered a control aid. The forecast can give a sense of whether current replenishment levels are adequate.

Typical industries were make-to-stock strategy is applied are commodities and consumer goods, since the same products are usually sold to many customers and the lead time of the sales order is usually very short.

Make-to-stock allows fast reactions to changes in market demand. Make-to-stock lends itself as a very good control mechanism that can signal when a problem is emerging.

One such problem may be that the demand increases sharply, and the current replenishment level may be insufficient.
Make-to-stock productions 

Short-term forecasting

Short-term forecasting is employed to fine tune an existing plan based on the new information obtained. The forecasting acts as an input to tactical decisions that an organization makes.

The short-term forecasting is concerned with the short time period usually less than one year. This is required for current production scheduling, purchases of raw material and inventory of stocks, etc.

The seasonality of sales and its impact on production planning, stocks, distribution of products in markets etc, will be taken care of by the short-term demand forecasting.

The forecasting data is used in a disaggregated fashion and analyzed in detail. For example, the sales data will be analyzed by region and product variety for possible short-term impact in a particular region or a variant of a product. Time-series analysis is used most often for short-term forecasting.

When historical data are not available managers use judgment methods for short-term forecasts during the product launch stage. Decisions regarding production, transportation scheduling, procurement and inventory management involve short-term forecasting.

The main limitation in short-term forecasting is the appearance of an unexpected event, such as a weather disaster or an unplanned shutdown.
Short-term forecasting

Demand forecasting

Forecasting is a necessary pre-requisite to most operational activists.  Demand is what customers would buy if they could.

Management is continually faced with fast-paced flow of business planning and decision-making situations. A forecast of some type is used as a basis to meet many of these needs, whereby, the more reliable the forecasts, the better the outcome for the planning and decisions.

A demand forecasting is a firm’s best estimate of what demand will be on the future given a set of assumptions.

According to American Marketing Association, demand forecasting is an estimate of sales in dollars or physical units for a specified future under a proposed marketing plan.

The definition of demand forecasting can also be made more relevant by contrasting the process of demand forecasting with two other business activities: business planning and goal setting.

It is a useful tool that can provide a variety of stakeholders for example airport and airline owner, potential inventors and the government - with useful insight into the potential future developments relating to both airports and airlines.
Demand forecasting

Forecast accuracy

Planning and coordinating the supply chain is a vital to ensure availability of the products to consumers.

Here, forecasting plays a key role as its accuracy drives inventory, hence supply chain efficiency and return on assets.

Accurately forecasting product demand is probably the single most important and most challenging measure of a company’s supply chain proficiency.

* It is necessary to check the accuracy of past forecasts against present performance and of preset forecast against future performance. Some comparisons of the model with what actually happens and of the assumptions with what is borne out in practice are more desirable.

*The larger the number of items involved, the more accurate the forecasts. Because of the statistical law of large numbers, the size of forecasting errors decreases as the number of items being forecast increases and vice versa.

*Another factor is the elasticity of demand. The more in-elastic the demand, the more accurate the forecasts. Therefore, the demand for necessities can be forecast with a higher degree of accuracy than that for non-necessities and demand for non-durable goods with a higher degree of accuracy than for durable.

*Also, as many supply chain practitioners have experience, it is usually possible to accurately estimate total demand three months in advance, while it is virtually impossible to forecast precisely on which day or even during which week a particular customer order will arrive.
Forecast accuracy

Definition of sales forecast

Forecasting is a systematic attempt to probe the future by inference from known facts. It is the amount of product the company actually expects to sell during a specific period under a proposed business plan or programme.

The sales forecast should originate in the demand side of the enterprise, because it is the demand side of the enterprise (sales and marketing) that is responsible for generating demand and that should have the best perspective on what future demand will be.

Sales forecasting is the basis of fund budgeting, all budgeting starts with the sales forecast. Financial planning for working capital requirements, plant expansion and other needs are based on anticipated sales.

The sales forecast differs from the company sales potential. It concentrates on what actual sales will be at a certain level of company marketing effort, whereas the company sales potential assesses what sales are possible at various levels of marketing activities.

In many companies, sales forecasting is an integral part of a critical process for matching demand and supply that is sometimes referred to as Sales and Operations Planning.

Sales forecast is the first step in many business organizations and is the core of marketing management.

Usually all other activities such as production plan, appointment of salespersons, quota setting, fixing of sales territories, price fixing, advertising and promotion programme, etc. are made after the determination of expected sales.
Definition of sales forecast

What is demand planning?

Supply chain processes in general span the areas of demand planning, order fulfillment, distribution, production and procurement.

Demand planning controlling has the task to control the quality of the forecast and the quality of the demand planning process itself.

It is the process that an organization takes to anticipate customer demand and ensure sufficient product is available – in the right place, at the right time, to the required level of service and at the lowest possible supply chain cost.

This process using the forecast as a foundation for their decisions (pre-production, purchasing, provision of additional capacity, etc) need a quality measure to understand the accuracy of the forecast and the dimension of possible deviations of the forecast from the actual demand.

As a result of demand planning, independent requirements are created, triggering further production, distribution and procurement planning.

Demand planning has the task to provide the production planning process with forecast to trigger production before the customer places the sales order.
What is demand planning?