Forecasting Horizons and the Role of Forecasting in Driving Business Decisions

Forecasting is the complex act of predicting the future. Given limited information, how can we infer a future trend? While some people may feel the goal of forecasting is know the future, I actually think it's really about planning. If this, then that. Without a shape of what the future could look like, we end up unprepared for our future. No one wants that.

But how do we effectively put forecasting to use? How can it change the way we do business and make our actions defensible? In other words, how can we rely on a forecast to drive business activities?

Planning is a response to your forecast and goals for the business. Without a forecast, it may be hard to do any real planning...

We can break down each type of forecast into a horizon - short-term, medium-term and long-term. Each has different needs and impacts on business planning. A short-term forecast would be used to plan daily activities like scheduling activities (e.g. determining right mix of nurse staff to optimize utilization at a hospital unit or perhaps staffing at a manufacturer to keep production output steady). A medium-term forecast might be used in supply and demand curves to determine when and how much supply needs to be obtained before demand catches up, or maybe for capital expenditures based on wear and tear of current machines in your warehouse. These are decisions that potentially need to be made a 2-3 months in advance. Finally, a long-term forecast would be strategic in nature and might account for market penetration and activities that drive revenue for example. Typically, it's a question of market share and how much a company wants to pursue and what it will take to get there.

Ideally, an organization has 3-4 critical forecasts per horizon (short-term, medium-term, and long-term) that can help plan activities to keep the business up and to the right. Importantly, there needs to be strong organization support for forecasting - how to do the forecasting, understanding different methodologies and working hard to deploy the forecasting models so every understands where they need to go. Creating an action plan from the forecast can help drive business strategy.