Operations Management: An Integrated Approach, 5th Edition

PRINCIPLES OF FORECASTING

There are many types of forecasting models. They differ in their degree of complexity, the amount of data they use, and the way they generate the forecast. However, some features are common to all forecasting models. They include the following:

1. Forecasts are rarely perfect. Forecasting the future involves uncertainty. Therefore, it is almost impossible to make a perfect prediction. Forecasters know that they have to live with a certain amount of error, which is the difference between what is forecast and what actually happens. The goal of forecasting is to generate good forecasts on the average over time and to keep forecast errors as low as possible.
2. Forecasts are more accurate for groups or families of items rather than for individual items. When items are grouped together, their individual high and low values can cancel each other out. The data for a group of items can be stable even when individual items in the group are very unstable. Consequently, one can obtain a higher degree of accuracy when forecasting for a group of items rather than for individual items. For example, you cannot expect the same degree of accuracy if you are forecasting sales of long-sleeved hunter green polo shirts that you can expect when forecasting sales of all polo shirts.
3. Forecasts are more accurate for shorter than longer time horizons. The shorter the time horizon of the forecast, the lower the degree of uncertainty. Data do not change very much in the short run. As ...