Forecasting is the process of making predictions of the future based on past and present data and analysis of trends. A common place example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, Forecasting starts with certain assumptions based on the management’s experience, knowledge, and judgment. These estimates are projected into the coming months or years using one or more techniques.
- Planning – outlines the company’s financial direction and expectations for the next three to five years.
- Budgeting – documents how the overall plan will be executed month to month, specifying expenditures.
- Forecasting – uses accumulated historical data to predict financial outcomes for future months or years.
Importance of Forecasting in Procurement and Supply Management
Forecasting is an imperfect science, but it is also a necessity for most businesses. That’s particularly true when it comes to supply chain management. Proper forecasting helps ensure you have enough supply on hand to satisfy demand. Business analysts use supply chain
management systems and other tools to forecast demand weeks and months in advance.
If your business overestimates demand, it ends up with more inventory than is necessary. This can increase your labor and storage costs if workers have to move this inventory to another storage facility to make way for new inventory. If your business supplies perishable goods, you might incur a further loss due to deterioration of unsold inventory. In such a case, you might need to sell inventory at a discount, which reduces your company’s profit margins and income.
Shortage of Inventory
Suppose you suddenly find yourself inundated with large orders. This is a nice problem to have – if you have enough inventory to meet demand. It’s not so nice if you failed to forecast how much supply you would need and wind up with a shortage of inventory. In such a case, some disgruntled customers might take their business elsewhere. One option is to make a large, lastminute rush order, but this usually leads to much higher supplier prices, which reduces your profit margins and net income.