Importance of Forecasting in Operations Management

Introduction

Forecasting the technique by which past and present data is analysed to plan for future. There are various types and ways of carrying out business forecasts depending on the objectives and desired outcome. It can be done to arrive at a general business forecast or can be applied to forecast specifically to predict departmental outcomes. It can vary from forecasting sales for a consecutive month to predicting the rate of demand during festive seasons.

Companies use a wide range of techniques and methods to for business forecasting. It can be predictions related to sales, expenses incurred, revenue or profits. These scientific predictions will help the companies take strategic decisions on time and prevent losses in advance. Business forecasts applied to operations management is discussed here.

Scope of Forecasting in Operations Management

Intelligent assumptions made with the help of proven techniques are used to make predictions. Such predictions help an organization to foresee future risks and plan accordingly. Apart from planning for uncertainties, forecasting helps operations management to envision future market demands, change in customer trends and preferences and availability of resources. It serves as a pillar for planning business operations. Forecasting is critical for the success of a business plan. Faulty or inefficient forecasting may lead to failures while a plan is executed.

Forecasting uses past business experience, performance and trends to predict the future outcomes and this provides acceptable accuracy for the forecasts. Operations management is benefitted from forecasting as adequate infrastructure allocations can be made doubtlessly. Forecasting, through its capacity to predict future market demands promote innovations and development of new products that is detrimental for the success of a business.

Different forecasting models and types are put to practical use based on the specific requirements of each company. It includes qualitative and quantitative models that give predictions based on personal assumptions of process experts to models that use quantitative techniques and statistics for accurate forecasts. All these types of forecasting help to plan the future on product demand, innovations and upcoming products, customer trends and uncertainties. Effective use of forecasting models yields successful results in operations management of organization.

Strategic Significance of Forecasting in Operations

Below detailed are some of the major areas where forecasting has a key strategic significance in operations management.

• Data availability − Available data can be analysed to predict future and formulate plan of operations accordingly. Forecasting has a strategic significance in the operations of a company. Planning about the adequacy of workforce, units of production required during a specific time, production capacity including downtime and managing supply needs effective forecasting.

• Planning − Forecasting helps to plan ahead for training and developmental activities of employees. Availability of trained workforce should be ready to take up projects as and when demanded. Maintaining a balance of trained employees with respect to expected demand is carried out through efficient forecasting. If a large demand is not foreseen the required skill training cannot be accomplished and puts the quality at risk.

• Production capacity − The production capacity also needs to be optimised enough to accommodate the changes in demand. A company failing to meet the market commitments tend to lose its market share and potential customers. On the other hand excess production may lead to cost overrun. Forecasting in operations help to anticipate the market demand and ensure seamless supply.

• Profit margins − Forecasting is an essential aid to maintain profit margins. A prior idea on delivery to be made for a specified time will save a lot of money. Emergency shipping and last minute production changes heavily increase operating costs. This could result in eliminating profit margins or even lead to loss.

Advantages of Forecasting in Operations Management

Forecasting has vital importance in the operations of a company. The main benefits of forecasting in operations management are as follows:

Establish business goals and planning

Business activities need to be planned ahead for making constructive decisions. Analysing data and using forecasting techniques to predict the future demands and trends help companies to decide on plans to prepare for the projected growth or change of the business process. Such pre-determined goals assist companies to better plan and evaluate progress ensuring success of the business. Integration of technology by use of forecasting software will enable organizations to better visualise predictions and take informed decisions based on forecasts.

Production planning

The area in business operations most affected demand fluctuations are production units. Efficiently planning activities in manufacturing units, scheduling sufficient labour force, anticipating required raw materials and other inputs are critical to reduce operating costs. Forecasts play a critical role in delivering projections on production planning as they have a direct impact on business productivity. Overcoming production bottlenecks, master scheduling operations, meeting delivery commitments and such sensitive areas are streamlined with the help of forecasting.

Adequate budgeting

Allocating adequate budget is a primary requirement to be carried out to meet operational requirements. Estimating the revenue and expenses over a specified period of time with plans for allocation and reserves is a complex process. Forecasts simplify this task by providing accurate predictions for future. It helps to convert available data into intelligent assumptions aiding best infrastructure allocation possible.

Market outlook

Another important benefit of forecasting in operations management is to understand market conditions and changing customer trends. Technology advancements and global players have created an immensely dynamic market situation. Anticipating the quality and quantity of demand help to better plan and deliver the products customers wish for.

Forecasting, thus, optimizes business strategies to align the existing operations in a way to satisfy the future market demands. Regular market forecasts help businesses to optimise resources and thus ensuring a stable market share.

Eliminate wastage

Business wastage is a crucial factor that shoots up operating costs resulting in low profit margins or even loss. Forecasting helps to identify underutilised resources, unproductive equipments and inefficient business processes while analysing existing data for making predictions. It can accurately spot out the idle business resources and help plan to eliminate or contribute to better utilization for overall business optimization.

Organization that operates in an incompetent way, due to excess idle resources eventually fades out under market pressure. Forecasting thus saves the business by stabilizing the resource utilization by minimizing wastage and plan ahead to meet the environmental demands.

Long-term infrastructural goals

Forecasting is beneficial to plan and establish long term capacity requirements. Improving facility design, advancements to be scheduled in operations of functional units, allocation of funds towards innovation and development and capital expansion needs proper and strategic planning. Forecasting long term requirements in these areas will help to derive inputs for initiating strategic decision making to meet such future situational demands.

Conclusion

Forecasting in business is a vital activity that could serve as a foundation for major decision making process including budget allocation. It is applicable to all business houses irrespective of their size, type or financial viability.

Forecasting in operations management assures a business with a defined plan to overcome risks and contingencies that might otherwise affect revenue and financial allocation. Forecasting allows businesses to identify and control factors in operations that can create short and long term impacts. It also helps companies to balance production based on demand forecasts.