Saturday, September 22, 2007

Forecasting: The Importance and Use

Forecasting can be more than simply a competitive advantage. It can be the grease that keeps the machinery of business running smoothly.

For companies, operational decisions for today are based on the expectations of tomorrow. Consider how it might be used in the hiring process.

Businesses will also use forecasting to determine whether they have the capacity to fill demand. When a company predicts an increase in demand, they can ramp up production, increase payroll, or purchase new delivery trucks to meet the anticipated demand. Should a company fail to meet its demand, it could lose marketshare and customers. Proper forecasting will also help ensure that excessive amounts of investment in capital are not made where it is not needed. Businesses should be able to calculate the amount of sales expected.

Human Resources may be able to predict turnover in particular departments of a company. Based on those expectations, HR can begin hiring and recruiting in advance. I have some very recent knowledge regarding this because I'm looking for a job after my graduation in May 2008. I have been meeting with recruiters now for jobs that they know will be available, based on forecasting. The HR departments at these firms know that X number of people will leave the firm, therefore they are recruiting X number of new hires to fill those positions.

Management of the Supply-Chain is the most clear use of forecasting. When producing something with multiple parts on a deadline, companies should be able to predict what pieces need ordered and completed by what time and when they need delivered by. Also, based on this, the materials and labor needed to complete each of those parts cost money, and firms should be able to predict what costs will be incurred at each phase of production.

When banks decide whether to offer a new loan to a firm, they may attempt to predict how well an investment will pay off. A firm that cannot manage its costs and inventory may increase risk, making it less likely to pay back its debts. Investors will not want to invest in firms that are less successful at anticipating needs.

As you can see, there are numerous uses for forecasting and it has an important role to play in the operation of a business. In my next segment I will discuss how forecasting is affected by it's time horizon.

Thanks for visiting. ------Sincerely, Trevor Stasik.

To visit the next post in the forecasting series, click HERE.
To return to initial post about forecasting, click HERE.

Visit this blog to see the importance of forecasting in determining demand for malaria drugs in Africa. Click HERE.

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