Forecasting is the blueprint or planning. it is the estimate of the demand of the future. It provides guidelines. how many of the products produced are likely to be demanded by the customer when these demands are likely to occur and the amount of business the firm can expect during the planning period.
In other words, forecasting is the forward casting of past data. Past is known or could be known from the experience and collection of past data. The future is unknown and at best could only be estimated based on the past Hence one has to be considered the reliability and precision of forecasting.
Type of Forecasting -
Forecasting may be classified on the basis of time span or range of forecast into three categories -
Long-Range Forecasting-
Long-range forecasting consists of a time period the more than 5 years.
Characteristics -
Normally it is difficult to model and foresee events for more than 5 years it is mainly due to economic uncertainty and variation in the behavior of the interrelated processes.
Applications - Mostly it is useful for capacity expansion, requirements, and diversification policies of the firm. It is useful in the following areas.
- Capital planning
- Plant Location
- New Product Planning
- Research and Development Planning
Medium range Forecasting -
The range of medium forecasting is generally from 1 to 5 years.
Characteristics
As the range of forecast is shortening 5 to 1 year. the accuracy of the forecast increases. this is due to a better understanding of the future and relatively lesser uncertainty estimates the reliability increases of the forecast may be useful in the medium-range forecast.
Applications -
It is very useful in the following areas.
- Sales planning and sale force decisions.
- Capital and cash planning
- Inventory planning.
- Production planning.
Short Range forecasting -
Short Range forecasting is typically used for less than a year term. in most cases, it is one for the session or a few months or a few weeks.
Characteristics -
Short-range forecasting is needed at a detailed level, such as the demand for specific items. the forecast may affect the purchasing activity. The specific value of the forecast is needed. there is very less scope for judgment is short-range forecasts and therefore past data are mainly projected into the future.
Applications -
Short-range forecasting is commonly used in the immediate control of activities.
- Purchasing
- Overtime decision
- Scheduling of Job
- Machine maintenance.