Business Forecasting

CHAPTER 1 Fundamental Considerations in Business Forecasting

Challenges in business forecasting, such as increasing accuracy and reducing bias, are best met through effective management of the forecasting process. Effective management, we believe, requires an understanding of the realities, limitations, and principles fundamental to the process. When management lacks a grasp of basic concepts like randomness, variation, uncertainty, and forecastability, the organization is apt to squander time and resources on expensive and unsuccessful fixes: There are few other endeavors where so much money has been spent, with so little payback.

This chapter provides general guidance on important considerations in the practice of business forecasting. The authors deal with:

• Recognition of uncertainty and the need for probabilistic forecasts
• The essential elements of a useful forecast
• Measurement of forecastability and bounds of forecast accuracy
• Establishing appropriate benchmarks of forecast accuracy
• The importance of precisely defining demand when making demand forecasts
• Guidelines for improving forecast accuracy and managing the forecasting function

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Although we were unable to secure rights to include it in this book, Makridakis and Taleb’s “Living in a World of Low Levels of Predictability” from the International Journal of Forecasting is an important piece worth mentioning in any consideration of fundamental issues.

Spyros Makridakis is very well recognized as lead author of ...