Components of a Forecast and Forecasting Methods

In the next section, we discuss the basic components of a forecast, explain the four classifications into which forecasting methods fall, and introduce the notion of forecast error. 

Yogi Berra, the former New York Yankees catcher who is famous for his malapropisms, once said, It s tough to make predictions, especially about the future. One may be tempted to treat demand forecasting as magic or art and leave everything to chance. What a firm knows about its customers past behavior, however, sheds light on their future behavior. Demand does not arise in a vacuum. Rather, customer demand is influenced by a variety of factors and can be predicted, at least with some probability, if a company can determine the relationship between these factors and future demand. To forecast demand, companies must first identify the factors that influence future demand and then ascertain the relationship between these factors and future d and. 

Companies must balance objective and subjective factors when forecasting demand. Although we focus on quantitative forecasting methods in this chapter, companies must include human input when they make their final forecast. Seven-Eleven Japan illustrates this point 

A company must be knowledgeable about numerous factors that are related to the demand forecast, including the following  

A company must understand such factors before it can select an appropriate forecasting methodology. For example, historically a firm may have experienced low demand for chicken noodle soup in July and high demand in December and January. If the firm decides to discount the product in July, the situation is likely to change, with some of the future demand shifting to the month of July. The firm should make its forecast taking this factor into consideration. 

---