Forecasting Methods
Introduction
All businesses are confronted with the general problem of having to make decisions under conditions of uncertainty. Management must understand the nature of demand and competition in order to develop realistic business plans, determine a strategic vision for the organization, and determine technology and infrastructure needs. To address these challenges, forecasting is used. According to Makridakis (1989), forecasting future events can be characterized as the search for answers to one or more of the following questions:
X What new economic, technical, or sociological forces is the organization likely to face in both the near and long term?
X When might these forces impact the firm¡¦s objective environment?
X Who is likely to be first to adapt to each competitive challenge?
X How much change should the firm anticipate both in the short run and the long run?
In this paper, I will provide an overview of forecasting methods and compare and contrast these various methods. The paper will then focus on how Mattel, one of the nations largest toy manufacturers, uses demand forecasting under conditions of uncertainty ¡V most specifically those relating to the pattern and rate at which customers demand products.
What is Forecasting? In Operations Management, demand forecasting is defined as ¡§the business process that attempts to estimate sales and the use of products so that they can be purchased, stocked, or manufactured in appropriate quantities in advance to support the firm¡¦s value adding activities.¡¨(Ross, 1995). Forecasting is a process that transforms historical time-series data and/or qualitative assessments into statements about future events. This process can produce either qualitative or subjective projections. Note that no forecasting process can consistently provide perfect forecasts. Any forecast that perfectly estimates subsequent events should raise cause for alarm, as this is probably indicative of improprieties such as
All businesses are confronted with the general problem of having to make decisions under conditions of uncertainty. Management must understand the nature of demand and competition in order to develop realistic business plans, determine a strategic vision for the organization, and determine technology and infrastructure needs. To address these challenges, forecasting is used. According to Makridakis (1989), forecasting future events can be characterized as the search for answers to one or more of the following questions:
X What new economic, technical, or sociological forces is the organization likely to face in both the near and long term?
X When might these forces impact the firm¡¦s objective environment?
X Who is likely to be first to adapt to each competitive challenge?
X How much change should the firm anticipate both in the short run and the long run?
In this paper, I will provide an overview of forecasting methods and compare and contrast these various methods. The paper will then focus on how Mattel, one of the nations largest toy manufacturers, uses demand forecasting under conditions of uncertainty ¡V most specifically those relating to the pattern and rate at which customers demand products.
What is Forecasting? In Operations Management, demand forecasting is defined as ¡§the business process that attempts to estimate sales and the use of products so that they can be purchased, stocked, or manufactured in appropriate quantities in advance to support the firm¡¦s value adding activities.¡¨(Ross, 1995). Forecasting is a process that transforms historical time-series data and/or qualitative assessments into statements about future events. This process can produce either qualitative or subjective projections. Note that no forecasting process can consistently provide perfect forecasts. Any forecast that perfectly estimates subsequent events should raise cause for alarm, as this is probably indicative of improprieties such as
References: Chase, R. et al. (2005). Operations Management for Competitive Advantage, 11th edition. McGraw-Hill Companies: New York. Makridakis, S. et al. (1998). Forecasting Methods and Applications, 5th edition. John Wiley & Sons: New York. Pereira, J. (1997). To these Youngsters, Trying Out the Toys is Hardly Kids Play. Wall Street Journal, 12/17/97. Ross,D. (1995). Distribution Planning and Control. Chapman & Hall: New York.