CSS Solved Business Administration Past Papers | (a) Supply chain managers should be aware of the characteristic of forecasting. Why or why not? Critically discuss in detail. (b) Discuss the components of a forecast and forecasting methods with examples. Explain the role of information technology in forecasting.
The following question is attempted by Miss Nimra Masood, the top scorer in CSS Business Administration papers. Moreover, the answer is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. This solved past paper question is uploaded to help aspirants understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.
Topic Breakdown:
The concept of the supply chain is incomplete without an understanding of forecasting. Key concepts of the supply chain, from lean management to the just-in-time principle, use forecasting as a tool to arrive at a decision.
Subject: Supply chain management
Chapter: Forecasting.
Introduction
Forecasting is one of the pillars of supply chain management. An efficient supply chain means successfully managing inventory to reduce cost on the one hand and, on the other hand, meet the current demand. Therefore, supply chain managers must be fully aware of forecasting as a tool to achieve efficiency. Knowledge of forecasting characteristics will help reduce errors and access firsthand information. Interestingly, there are several forecasting methods and components to cater to varying situations. Moreover, information technology has played a revolutionary role in making forecasting ever more important.
Definition of Forecasting
“Forecasts are predictions or estimates of the changes if any in characteristic economic phenomena, which affect one’s business plan” McFarland
OR
“business forecasting is the calculation of reasonable probabilities about the future, based on toe analysis of all the latest information by tested and logically sound statistical and econometric techniques, as interpreted, modified and applied in terms of an executive’s personal judgment and social knowledge of his own business and his own industry or trade.”
Characteristics of Forecasting and supply chain managers
- Forecasts are always inaccurate and should thus include both the expected value of the forecast and a measure of forecast error.
- Importance for supply chain managers:
Supply chain managers must realize the forecasts are prone to error; thus, they must prepare demand by acknowledging this fact. For example, two dealers expect their car sales to be around 1000 units, while one dealer does not consider forecasting error therefore, its estimate range is large (500-1500). On the other hand, the other dealer that considers forecasting error has a more accurate forecasting range of (900-1100). Hence, to achieve accuracy and efficiency, managers must consider forecast errors.
- Importance for supply chain managers:
- Long-term forecasts are usually less accurate than short-term forecasts.
- Importance for supply chain managers:
Short-term forecasts are relatively more accurate as they have a short lead time. Supply chain managers must take into account external factors like the economy, political situation, competition and, above all, change in demand can impact the accuracy of long-term forecasts. Therefore, managers must take a holistic view of forecasts and other factors for long-run estimates.
- Importance for supply chain managers:
- Aggregate forecasts are usually more accurate than disaggregate forecasts.
- Importance for supply chain managers:
Managers must know about the fact that aggregate forecasts with a wide range and broad scope are a lot more accurate than the forecasts for a particular product or limited scope.
- Importance for supply chain managers:
- In general, the farther up the supply chain a company is (or the farther it is from the consumer), the greater is the distortion of information it receives.
- Importance for supply chain managers:
The last characteristic of forecast explains that distributors may be able to attain a more accurate forecast as compared to the producer that is farthest away from the consumer. Therefore, supply chain managers must take into account their position in the supply chain and then estimate the forecast error accordingly.
- Importance for supply chain managers:
Components of a forecast and forecasting methods:
- Components of a forecast:
Normally, it is expected that forecasts are predicted by taking into account historical trends and growth; however, there are certain elements associated that make forecasts unpredictable.
- Systematic component:
The component that measures the expected level by taking into account history, seasonal patterns and trends etc., for example, warm garments like sweaters, coats and boots etc., are more in demand in the winter season, while in summer, their demand reduces considerably.
- Random Component:
Part of the forecast deviates from the systematic part. This part is actually responsible for forecasting errors. All the forecaster can predict is its size and variability to provide an estimate of the forecasting error.
- Forecasting Method:
There are four different types of forecasting methods.
- Qualitative:
This method is predominantly subjective and relies heavily on human judgment. Such method is effective when there is little or no historical data available or the experts have market intelligence. Moreover, it may also be effective for long-term forecasting.
- Time Series:
This method relies on historical data and current trends. This method is most effective when the demand pattern has not varied significantly over the years. It is the simplest of the methods. For e.g., a company can predict the demand for basic commodities like tea and soap based on previous trends.
- Causal:
This method is based on the assumption that forecast relies heavily on certain environmental factors. The causal method correlates forecast with certain environmental factors and estimates its forecast based on the future of that particular factor. For e.g. price is strongly correlated with demand. Therefore, companies use different pricing strategies to fluctuate demand.
- Simulation:
Simulation forecasting methods imitate the consumer choices that give rise to demand to arrive at a forecast. Using simulation; a firm can combine time-series and causal methods. Airlines simulate customer buying behaviour to forecast demand for higher-fare seats when there are no seats available at lower fares.
Role of information technology in forecasting
Forecasting and information technology always go hand in hand due to the immense amount of data involved in forecasting. Information technology can provide the following advantages in forecasting:
- It helps to easily manage and store large amounts of data.
- It helps in demand planning in a mechanical and effective method
- It is useful in keeping track of historical forecasting errors so that they can be considered in decision-making.
- It helps in forecasting in a well-structured manner with accurate errors to make decisions making more effective.
- It can help in determining the most accurate forecasting method for a particular industry.
Conclusion:
Forecasting has unique characteristics that spread across several methods and components. The supply chain manager must have comprehensive knowledge about all the elements of forecasting to manage accurate demand and supply for effectiveness and efficiency. Different industries have different challenges; thus forth, forecasts may vary accordingly for managers to keep a close look. To conclude, a better understanding of forecasting can help reduce cost and ensure efficient inventory for the company.
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