Business forecasts are classified according to period, time and use. There are long term forecasts as well as short term forecasts. Operation managers need long range forecasts to make strategic-decisions about products, processes and facilities. They also need short term forecasts to assist them in making decisions about production issues that span, only few weeks. Forecasting forms an integral part of planning and decision making, production managers must be clear about the horizon of forecasts.
The three divisions of forecast are short range forecast, medium range forecast and long range forecast.
- Short range forecast: It is typically less than 3 months but has a time span of up-to 1 year. It is used in planning, purchasing for job schedules, job assignments, work force levels, product levels.
- Medium range forecast: It is typically 3 months to 1 year but has a time span from one to three years. It is used for sales planning, production planning, cash budgeting and so on.
- Long range forecast: This has a time span of three or more years. It is used for designing and installing new plants, facility location, capital expenditures, research and development, etc.
Medium and Long range Forecasts deal with more comprehensive issues and support management decisions regarding design and the development of new products,plants and processes. Short range forecasts tend to be more accurate than the long range forecasts .
Application of Short Range forecasts
Short range forecasts provide operations managers with the information to make important decisions such as the following:
- How much inventory of a particular product should be carried next month?
- How much of each product should be scheduled for production next week
- How much of each raw material should be ordered for delivery next week?
- How much workers should be scheduled to work on regular time basis and on overtime basis next week?
- How many maintenance workers should be scheduled to work next week?
Application of Long Range forecasts
Long range forecasts provide, operations managers with information to make important decisions such as the following:
- Selecting a product design. The final design is dependent on expected sales volume. If the demand is high, the design should be such that the product can be mass produced ton ensuring low costs manufacture.
- Selecting a production processing scheme
- Selecting a plan to supply scarce materials
- Selecting a long range production capacity plan
- Selecting a long range Financial Plan for acquiring funds for capital investment
- To build new buildings and to purchase new materials
- To develop new sources of materials and new source of capital funds(finance)
Credit: Managerial Economics-MGU