Forecasting is the prediction of what happens to a given element within the framework of a given set of conditions.
The basic objective of a forecast is to reduce the range of uncertainty within which decisions are made that affect the future of the business and with it to all parties involved. Although the prognosis does not replace the administrative judgment in the decision making, it is simply an aid in that process.
The forecasts are used in the process of establishing goals both long and short term, thus forming bases for the development of plans, at a general level and in the different areas or units.
In the production area, forecasts are made of the cost and availability of the raw material, the cost, and availability of labor, when maintenance will be required for the equipment, what capacity will be necessary to meet the demand.
Depending on the timeframe they serve, they are classified as:
Short term. They are used to design immediate strategies, are employed between middle managers and front line managers.
In the medium term. Joint short and long term, useful for decisions at all levels.
Long-term forecasts. Required to set the general direction of the organization, are generally made for senior management to use them in strategic planning processes.
According to the intensity of data usage, they are classified as:
Qualitative forecasts. They are based on the judgment of individuals or groups of individuals, can be presented in numerical form but are generally not based on historical data sets.
Quantitative forecasts. They employ significant amounts of previous data as the basis of prediction. They may be:
- Simple (non-formal): projecting past data into the future without explaining future trends.
- Causals (explanatory): try to explain the functional relations between the variable to be estimated (dependent variable) and the variable or variables that explain the changes (independent variables).