Sunday, September 23, 2007

Forecasting: Time Horizons

When considering your forecasts, be sure to note the frame of time in which it predicts. The advantages, style and method of a forecast for tomorrow will be significantly different from one for a year from now.

Short Range-Less that 3 months
Short Range forecasts are typically the most accurate. This is because the predictions are made from known facts and figures. Managers and corporate officers know what has already been ordered and can draw plans based on these numbers. Very little guess work is needed, just due diligence in making sure scheduled tasks are completed on time. These forecasts are good for planning workforce levels, immediate project scheduling, purchasing plans, and production levels.

Medium Range-3 months to 3 years
Medium Range forecasts are believed to be fairly accurate. Values of recent activities are already known and trends can be calculated based on this. Quantitative methods of forecasting tend to be used very frequently in this time frame. These prognosis tend to focus on sales planning, production planning, and most ordinary budgeting.

Long Range-More than 3 years
These long term forecasts can have low accuracy, therefore requiring constant revisions and updates. The long range time frame is excellent for planning R&D projects or giant construction projects that may adapt to changes over time. One such example would be the Chunnel. The Chunnel is a massive tunnel that burrows beneath the English Channel in Europe. This project began planning in 1986 and completed construction in 1994. With over 13,000 workers and a cost of £10 billion* you can bet that forecasting was a key in the completion of the project. (* £10 billion is equal to approximately 20.3 billion USD on today's date)

Lastly, longer term forecasts include qualitative analysis as well. Intuition and instinct can play a role in developing forecasts. This is the "art" of forecasting. I will dig deeper into qualitative analysis in the next segment of this blog series.

I hope this has been instructive. Please drop me a comment about forecasting. Thanks for reading. -------Sincerely, Trevor Stasik.

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