Forecasting
You are in charge of creating a forecast for an organization that manufactures laptops. The industry is very competitive and supplies have to be purchased far enough ahead of time so that there is no delay in the manufacturing process should the demand increase.
• Which forecasting technique would you choose?
• What are the steps in the forecasting process?
• Why is it important to create a forecast for the correct period of time?
• What happens when a forecast is created for 3 months when an
organization needs an accurate
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forecast for 6 months?
• How can you measure the accuracy of a forecast?
1. Choosing the Forecasting Technique:
In this scenario, a quantitative forecasting technique would be more appropriate for forecasting laptop manufacturing demand. Techniques like time series analysis, moving averages, exponential smoothing, or regression analysis can be used to analyze historical data and predict future demand based on trends and patterns.
2. Steps in the Forecasting Process:
The steps in the forecasting process can vary, but generally include the following:
a) Define the purpose and objective of the forecast.
b) Gather historical data relevant to the forecast.
c) Clean and preprocess the data.
d) Choose an appropriate forecasting technique.
e) Apply the chosen technique to the data.
f) Evaluate and validate the forecast accuracy.
g) Implement the forecast in the manufacturing process.
h) Continuously monitor and update the forecast as new data becomes available.
3. Importance of Correct Forecast Period:
Creating a forecast for the correct period of time is crucial to ensure that the organization can adequately plan its resources and manage its supply chain effectively. If the forecast period is too short, there is a risk of stockouts or delays in production if demand suddenly increases. Conversely, if the forecast period is too long, there may be excess inventory or obsolete products, leading to waste and financial losses.
4. Consequences of Creating a Short-term Forecast Instead of a Long-term Forecast:
When a short-term forecast of 3 months is created instead of a required accurate forecast for 6 months, the organization may face various issues. There may be insufficient time to procure necessary laptop components, resulting in production delays and potentially lost sales opportunities. It may also hinder the optimization of the supply chain, resulting in higher costs and lower profitability.
5. Measuring Forecast Accuracy:
Forecast accuracy is typically measured using error metrics such as Mean Absolute Deviation (MAD), Mean Squared Error (MSE), or tracking signal. These metrics compare the forecasted values to the actual values, indicating the level of deviation. The lower the error values, the more accurate the forecast. Comparing forecast accuracy across different techniques or time periods helps in choosing the most reliable forecasting method.
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