1-9.5 Forecasting

Forecasting is used to estimate the conditions that will exist over a future period. There are long-, medium-, and short-term forecasts:

• The long-term, strategic business forecast focuses on the overall market. The level of detail is not in-depth, and it provides for long-range planning, with an outlook that spans years.
• The medium-term, tactical forecast accounts for budgets, market planning, long lead time, purchase items, and inventory levels. The midrange outlook is for 12–26 months.
• The operational forecast is for the short term. The perspective is of individual products and services, and the outlook is on a monthly or quarterly basis.

Historical data are widely used to forecast, based on the assumption that what has happened in the past will happen again in the future. Similarly, demand from January can be used to forecast demand in February; if it is assumed that demand varies little from month to month. This assumption is realistic if demand is seasonal and trends vary nominally; however, such forecasts do not take into account random fluctuation. Common forecasting techniques that average historical demand, including moving averages, exponential smoothing, and seasonal forecasts, diminish some effects of random variation and, in combination with other techniques, are used to establish replenishment and repair plans.