Forecasting Methods in Operations Management

Introduction

Successful firms in the current competitive business environment have learnt the art operation management forecasting. According to Stevenson (2015), for a firm to succeed in the current market, its management must be in a position to predict the future in order to make an informed decision on issues such as production requirements, the product that the market needs, inventory that will support future productions, personnel that will be needed in various departments, and how to face emerging market trends. A firm must come up with effective forecasting methods in operations management that will enable it to predict these factors in order to develop response mechanisms which are appropriate. In this paper, the researcher will focus on forecasting methods in operations management.

Discussion

According to Heizer and Render (2013), many firms are currently forced to be keen in forecasting changes that are expected in the production strategies. The emerging technologies have redefined the approach that business units use in their production methods. Many firms are using state-of-the-art technologies in order to produce high quality products that can sustain the stiff competition in the market.

However, the problem is that these production technologies keep changing, forcing many firms to adjust their operations in order keep up with the changing trends. Sometimes these changes may prove very costly, especially when they are sudden and very important. For this reason, a firm needs to have a strategy that can enable it to forecast the future production requirement in order to know how to adjust its internal operations in line with these changes. This will help in ensuring that there is a smooth transition from one system to the other.

Economic, technological, and operations management demand forecasting

The main factor that differentiates these three approaches of forecasting is what they seek to achieve. According to Stevenson (2015), economic forecasting refers to the process of predicting the future of an economy on issues such as the gross domestic product, inflation fiscal deficit, or unemployment. What makes economic forecasting unique from the other two methods of forecasting mentioned above is that it is wholly based on statistics.

The values must be calculated statistically. Technological forecasting is defined by Bozarth and Handfield (2008) as the prediction of the future changes in the usefulness of technological machines, techniques, and procedures. Technological forecasting remains one of the biggest challenges that many firms face in the current society. Predicting the techniques, procedures and machines that will be relevant tomorrow is not easy.

Stevenson (2015) says that even the technological experts themselves do not know what they will bring to the market tomorrow. Because of this unpredictability, Heizer and Render (2013) says that a firm should make an effort to understand the trend taken in a given technological sector. This makes it easy to know how to respond to the changes in case they occur. Operations management demand forecasting on the other hand, refers to the ability of the management to predict future changes and demands on issues of operation such as product, production, inventory, and personnel among others. It involves predicting future forces that may affect the operations of a firm in one way or the other.

These three forecasting methods are very important to a firm’s management unit. The predictions about the future of the economy help the management to know the possible changes in demand for their products. This way, a firm will know whether it is appropriate to plan for an alternative market to support its production or to increase its production capacities to support the expected increase demand. Technological predictions help a firm to be technologically relevant at all times. According to Stevenson (2015), many firms have been forced out of the market because of their inability to predict technological changes. One good example is Kodak Films.

Once the world’s leading company in the firm industry, Kodak Films made a wrong calculation in terms of predicting the future of technology. This mistake proved to be very costly. It almost forced this firm out of the market. Operations management demand forecasting has everything to do with internal operations within the firm. Failure of a firm to predict changes in these internal operation factors may be very dangerous. Using the expected changes in the external environment such as economy and technology, a firm should be able to predict expected changes in its internal operations.

Strategic Importance of Forecasting

According to Bozarth and Handfield (2008), the importance of forecasting to business entities can be demonstrated in many ways. The business world of today has many challenges, top of which is the stiff competition because of the word that technology has turned into a global village. There is a paradox that firms in the modern society are forced to withstand. Heizer and Render (2013) says that the need to predict the future has become more important than it ever was in the previous society. This is so because any mistake or misinterpretation of the emerging trends may offer rivals opportunity to surge ahead in the race to win customers.

However, the ability to predict the future has become even more challenging than it ever was in the past. It has become more challenging at a time when it is needed the most. In this section, the researcher will look at the strategic importance of forecasting to human resources, production capacity, and supply chain management.

Importance to human resources

According to Bozarth and Handfield (2008), human resource is the most important of all the resources at the disposal of a firm. They are responsible for all the operational activities. Successful firms have been able to have the employees with the right attitude, skills and competencies to run various projects. Changes in the external environment may necessitate the need to restructure the human resource. Issues such as downsizing and rightsizing may arise. However, such moves may affect the attitude of the employees and their commitment towards the firm if it is not done in an appropriate manner. Having the knowledge about the future needs of the employees may help a firm to know how to plan for such actions. It may also help the human resource management to know the people who should be hired to deal with the new forces expected to occur in the market.

Importance to production capacity

A firm should be in a position to know how to adjust its production capacities based on the changing demands. It may not be easy to make sudden changes in the production capacity and achieve success. A firm should be able to understand the market trends, determine the expected changes in demand, and lay down structures that will enable it to adjust its production capacity based on the expected changes in demand.

Importance to supply chain management

Supply chain management is another important management task that needs forecasting. A firm needs to ensure that its supply chain is adjusted as per the changes in its production and marketing needs. Once a firm has been able to predict that the demands for its product will increase, it will be necessary to redefine its supply chain to ensure that it gets the materials needed for production in time. Its warehousing and transport capacities must also be adjusted in equal proportions in order to support the new demands.

Quantitative Forecasting

One of the most popular types of prediction is quantitative forecasting. It involves predicting the future in a statistical approach. If it is the issue of product, as mentioned above, a firm will be interested in determining the changes in the amount of product the market will demand in the future. The forecasting will inform the management whether it is necessary to increase its volume of products or lower it based on the capacity of the market where a firm operates. Many firms are using quantitative forecasting to determine how to expand their operations. Sometimes the current market forces may remain constant.

However, a firm may forecast what the demand will be if the market is expanded beyond the current region. One main advantage of quantitative forecasting is that it gives the statistical estimates of what is expected of a firm.

According to Bozarth and Handfield (2008), a firm that has the ability to correctly forecast the future market trends is able to specifically define the amount of products needed by the market per given period. This means that the management will be able to know when to reduce or increase its production capacity and the percentage increase or decrease that is expected. This eliminates loss that may be witnessed when a firm produces more than what can be absorbed in the market. It also eliminates cases where a firm produces lesser products that cannot support the demands in the market.

However, quantitative methods of forecasting have one major weakness that makes it inadequate when it is used independently. It does not give the nature of the given event beyond the statistical values. For instance, it may not give a clear explanation of how a given change is going to influence the nature of the market. Other than stating that the demand will be increased, it cannot explain changes on issues such as market segments and trends, change in testes and preferences, areas that technology will affect among other prediction. Knowing the statistical value of a given change factor is not enough. Understand the expected patterns and how the patterns may influence the operations of a firm is very important.

Conclusion

Forecasting is a very important managerial role that defines the ability of a firm to manage market dynamics. This paper reveals that for a firm to achieve success, it should be in a position to use effective operations management demand forecasting methods to determine the expected changes in the market. It must be able to predict the market demands in order to know how to adjust its human resource, supply chain, and production capacities. Failure to have effective methods of predicting the future market forces may limit the ability of a firm to manage market challenges.

References

Bozarth, C. C., & Handfield, R. B. (2008). Introduction to operations and supply chain management. Upper Saddle River: Pearson Prentice Hall. Web.

Heizer, J. & Render, B. (2013). Principles of Operations Management. New York: Pearson Education. Web.

Stevenson, W. J. (2015). Operations management: Series in Operations and Decision Sciences. New York: McGraw-Hill Education. Web.