Forecasting at EBBD
To: Report to Danny Wilco
From: Jose Silva
Subect: Forecasting at EBBD
The management team at EBBD wanted me to look deeper into the way EEBD utilizes forecasting methods, what other techniques are out there that could be available, and how they can improve their short term forecasting on an annual, quarterly, and monthly basis. They are also interested in long-term forecasting, i.e., two or three years. Lastly, they want to know how they can generate quarterly inflation forecasts.
1. In order to maintain a proper balance between company goals and customer expectations, we must assume EBBD managers are often required to provide better service with fewer resources. 2. EBBD’s approach in forecasting is not only a projection of future business but it is also a request or resources that will ensure a supply of a product. Assuming their monthly costs and operational budget reviews are productive, this process should provide desired results. 3. Assuming this environment is constant, the importance of effective forecasting is huge. When it is decided to place a determined amount of a product on a forecast, we expect both the resources and the products to be available. It is here where forecast accuracy becomes critical to ensure that expectations will be met with minimal fluctuations. 4. EBBD management often operates under conditions of risk and uncertainty and one of the most important tools to reduce risk in decision-making is forecasting. I will evaluate the level of efficiency of current forecasting method used in EBBD. 5. There is a difference between forecasting for an existing product line and for a new product. Critical evaluation will show if the proper forecasting tool is applied to each individual situation.
Companies that are trying to improve themselves come to the realization that in order to reach operational excellence they must both satisfy their customers as well as manage their own resources properly. When forecasting is done effectively, distribution companies are able to meet the requirements of a demanding customer as well as meeting their own expectations and the expectations of their shareholders. I will highlight the information on the different forecasting methods currently used by EBBD and my feedback on their overall impact on the company.
Observation # 1. Current products forecasting method.
The EBBD Management Team meets once a month to review the monthly financial report. The output of these meeting results in a comparison of previous months’ forecasted volume. Based on this, forecasts for the next quarter will be updated as well the forecast for next year. This current forecasting technique is a “one tool fits all” approach applied to different requirements (short term-monthly, quarterly, and long term- annual). Short Term forecast requirement is different than long term forecast requirements. The technique being used here is trying to predict future requirements by “looking back”.
Current method of forecasting used by EBBD is a Quantitative Method. This method works well when historical data is available which constructs a forecasting model using available data. It is more fit for use in short-term forecast which is driven by a robust sales and operations planning process. Data for weekly/monthly demands can be compared to previous months versus current purchase orders and will provide a good idea of short-term forecast. The disadvantage of this method would be the lack of data, which in this case, is readily available.
Observation # 2. Lack of Long Term Forecasting method.
Based on the aforementioned I can deduct their current Quantitative Method alone cannot support long-term forecasting requirement. Long term...
References: 1. Financial Accounting, Fourth Edition, Kimmel, Weygandt, Kieso, John Wiley &
2. Principles of Forecasting, Norwell, Massachusets, Kluwer Academic Publishers, 2007
3. Forecasting Methods and Techniques, http://smallbusiness.chron.com/methods-
4. SalesForecasting, at http://www.tutor2u.net/business/marketing/sales
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