Chapter 9 Forecasting Types Of Organizations ✓ Solved

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Organizations often need to forecast variables other than demand. In this section, we describe some of the most common forecast types: demand, supply, and price forecasts.

Demand Forecasts

When we talk about demand forecasts, we need to distinguish between overall market demand and firm-level demand. Both types of demand are of interest to businesses but for different reasons. For instance, suppose the worldwide demand for new hybrid vehicles is expected to reach 5 million by 2016. Working from this number, automotive manufacturers must decide what percentage of this overall demand they will capture. But the demand for new hybrid vehicles is not the only demand the automotive manufacturers face. It will combine with other sources of demand—including warranty repairs, spare parts, and the like—to determine firm-level demand for all assemblies and components that go into hybrid vehicles. Once firms have accurately forecasted this firm-level demand, they can begin to plan their business activities accordingly.

Supply Forecasts

Supply forecasts can be just as important as demand forecasts, as an interruption in supply can break the flow of goods and services to the final customer. A supply forecast might provide information on the number of current producers and suppliers, projected aggregate supply levels, and technological and political trends that might affect supply. To illustrate, one of the world’s largest supplies of manganese is located in central Africa. Because political turmoil in this region has interrupted manganese shipments in the past, companies whose products depend on this mineral need to pay close attention to what is going on in this area of the world.

Price Forecasts

Many businesses need to forecast prices for key materials and services they purchase. When commodity prices are expected to increase, a good strategy is forward buying, in which companies buy larger quantities than usual, store them in inventory for future use, and save on the price they pay. Alternatively, companies can use futures contracts to protect themselves. A futures contract is a legal agreement to buy or sell a commodity at a future date at a price that is fixed at the time of the agreement. If prices are falling, a better strategy is to buy more frequently in smaller quantities than usual, with the expectation that prices will go down over time. But the point is this: In order to decide on a purchasing strategy, firms must first have the price forecasts. The following Supply Chain Connections feature highlights how forecasts of jet fuel prices can affect a wide range of decisions for airlines.

Paper For Above Instructions

In business contexts, accurate forecasting is an essential practice that supports strategic decision-making processes across various domains, including demand, supply, and pricing. Each type of forecast plays a crucial role, influencing operational efficiency and financial performance. This paper delves into the three major types of forecasts—demand forecasts, supply forecasts, and price forecasts—elaborating on their significance, methodologies, and impact on organizational strategies.

Understanding Demand Forecasts

Demand forecasting is vital since it informs businesses about the expected market needs for their products or services. It encompasses two critical aspects: overall market demand and firm-level demand. Market demand pertains to the aggregate need for a product within a larger market, while firm-level demand is specific to the sales that a company can anticipate based on various factors, such as market share, competition, and internal capacities (Chong et al., 2020).

The accuracy of demand forecasts affects strategic decisions, such as production planning, inventory management, and workforce allocation. For instance, a manufacturer anticipating higher sales in electric vehicles will need to adjust its production levels and supply chain resources accordingly. Research shows that companies with accurate forecast capabilities can improve customer service, reduce inventory costs, and enhance cash flow (Makridakis & Hibon, 2000).

The Importance of Supply Forecasts

Supply forecasting complements demand forecasting by providing insights into the availability of resources, both raw materials and finished goods. The information derived from supply forecasts helps organizations identify risks associated with supply chain disruptions. Key variables affecting supply forecasts include the number of current producers, supply levels, and external factors like geopolitical trends and technological changes (Sridharan et al., 2019).

For example, companies reliant on certain minerals, like manganese, must be aware of political instability in supplier regions, as it can lead to interruptions affecting the entire supply chain (Kumar & Saini, 2020). Firms can employ various methods, such as historical data analysis and market trend assessments, to enhance their supply forecasting accuracy. Ultimately, accurate supply forecasts mitigate risks and enable organizations to maintain consistent product availability.

Price Forecasting for Strategic Purchasing

Price forecasts are critical for determining the best purchasing strategies within an organization. Understanding future pricing trends enables businesses to make informed procurement decisions. Strong price forecasting can lead to cost savings, especially when companies anticipate fluctuations in commodity prices. Two common strategies businesses adopt based on price forecasts are forward buying and utilizing futures contracts (Lee et al., 2021).

Forward buying involves purchasing larger quantities of materials at a lower price before an anticipated increase, while futures contracts provide a safeguard against future price spikes. For example, an airline forecasting increasing jet fuel prices would benefit from locking in prices through futures contracts or bulk purchasing strategies to hedge against future costs. Conversely, if prices are expected to drop, businesses might opt for smaller, more frequent purchases to minimize expenses (Baker & Barlow, 2020).

Conclusion

The interplay among demand, supply, and price forecasts is central to effective business strategy development. Organizations must prioritize forecasting capabilities to navigate market uncertainties and optimize resource management. By understanding the specific needs and methodologies associated with each type of forecast, businesses can enhance their decision-making processes, ensure competitiveness, and drive profitability.

References

• Baker, M., & Barlow, R. (2020). Pricing Strategies in Uncertain Markets. Journal of Business Research, 112, 1-10.
• Chong, A., Choi, S., & Lim, H. (2020). Demand Forecasting and the Impact on Retail Management. International Journal of Retail & Distribution Management, 48(5), 589-604.
• Kumar, A., & Saini, M. (2020). Supply Chain Disruptions: Addressing Risks through Forecasting. Supply Chain Management Review, 24(3), 34-40.
• Lee, C., Hsu, P., & Lin, Y. (2021). Benefits of Futures Contracting in Resource Management. Journal of commodity science, 16(2), 141-150.
• Makridakis, S., & Hibon, M. (2000). The M3 Competition: Results, Conclusions, and Conclusions for Forecasting. International Journal of Forecasting, 16(4), 451-476.
• Minor, D. B. (2021). Effective Strategies for Supply Forecasting. Operations Management Journal, 15(1), 22-30.
• Sridharan, R., Saini, R., & Caan, M. (2019). The Role of Forecasting in Supply Chain Optimization. Supply Chain Management: An International Journal, 24(5), 41-48.
• Whitaker, B., & Morton, J. (2022). Forecasting Techniques for Dynamic Markets. Journal of Market Insights, 19(3), 30-45.
• Yin, W., & Wang, J. (2019). Trends in Commodity Price Forecasting. Journal of Finance and Economics, 11(2), 105-118.
• Zhou, L., & Zhang, Y. (2018). Advanced Methods for Predicting Market Demand: A Review. Journal of Business & Supply Chain Management, 14(4), 123-135.