By Lloyd M. Clive, CFPIM

Perception and Planning
Strategies for taking the sting out of your forecast
I volunteered as a Scout leader for a few years, and it always was interesting to work with the boys to plan an outing. We considered it good leadership for every boy to participate in the planning. Some of the information was determined easily, such as how long a trip would last or how many people were coming. Some things, however, needed a forecast. Was it likely to rain? What would we do if it did rain? The best plans had two essential ingredients: First, everyone worked to the same plan; second, all pertinent information was included in that plan. In the business world, there are many methods of forecasting product demand, and they must include all known information. Extrinsic forecasting methods involve factors such as economic conditions, market trends, competition, government regulations, or the sale of related goods. These techniques look for patterns or correlations linking product demand with these outside factors. Qualitative forecasting techniques most often are used for extrinsic forecasting. They are employed by senior managers and involve using good judgment, intuition, and informal opinions. Qualitative forecasting is necessary for products where no previous sales data exist. Intrinsic forecasting, on the other hand, uses data from previous sales, and the forecast is developed using that sales history. This quantitative forecasting is done by most members of a supply chain, especially those near the final consumer. Many factors can be included in the forecast along with traditional methods to improve forecast reliability.

Principle 2: Forecasts must include some measure of error. The forecast is going to be wrong—but by how much? Estimates of forecast error can be made by studying past performance. This then can be used to plan extra capacity