The Importance Of Forecasting in Market Operations

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The Importance Of Forecasting in Market Operations

"I have seen the future and it is very much like the present, only longer." says Kehlog Albran in his book The Profit. This pseudo-philosophy is actually a concise description of forecasting, the science of predicting future events.

From an operational point of view, market opportunities are the driving force behind production decisions and these opportunities are compiled in the form of demand forecasting which then provides the input for planning production: process design, capacity planning, aggregate planning, scheduling, and inventory management. But why is forecasting so important for operations?

In order to understand the factors of forecasting, one should imagine himself as a part of a supply chain, e.g. a factory. A factory's job is to be able to supply the market demand with lowest operating costs possible. Forecasting in a factory plays the hardest role of knowing what to produce now in order to supply the demand in the future and containing the resources available on hand to do this. The challenge is not only to come up with the future demand and the efficient manufacturing design but also to beat the lead times in between the chains in the systems. The errors can be costly in this process. Overshooting in the forecasts will result in inventory costs in the factory, where underestimating will cause late orders, extra labor costs, missed sales opportunities, stockout costs, and even production close dow...

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