Production Forecasting- Benefits & 4 Main Types

Production Forecasting October 29, 2020

Chloe Henderson

Writer

Extensive planning goes into orchestrating the production of goods and services, from sourcing materials to organizing final deliveries. However, without knowledge of future demand, all of the time and money invested in production planning could go to waste.

By creating production forecasts, manufacturers can take the guesswork out of estimating market trends, enabling them to balance supply and demand.

What is Production Forecasting?

Production forecasting is the estimation of future demand for a company's goods and services. It also predicts the number of resources that are required to manufacture specific product lines. Resources could include manual labor, funds, machinery, and raw materials.

Accurate production forecasting evaluates the 6 M's of management-

Men (human resources)

Money (financial resources)

Materials (inventory)

Machines

Methods

Market

Production forecasting also considers future technological advancements that could enhance manufacturing, as well as competitors' strategies to maintain customer satisfaction. Therefore, this process estimates a wide range of future events that could impact their ability to meet customer demand.

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To begin, production managers need to gather data on historical and real-time events. Management can use this information as a reference for projecting the demand for existing product lines. Since data is not available for new items, managers should conduct market research and gather performance metrics on similar goods to predict the demand for upcoming products.

In order to formulate accurate forecasts, production managers need a combination of statistical techniques, objective calculations, and subjective judgments. Businesses can streamline production forecasting by implementing software that automatically analyzes past and real-time data to generate estimations.

With forecasting tools, companies can eliminate guesswork and start making data-driven decisions.

Types of Production Forecasting

A company's ability to match their operations with actual demand is a significant element in measuring performance. When production is too low, companies cannot fulfill all incoming requests, resulting in dissatisfied customers and lost sales.

On the other hand, overactive production yields a surplus of inventory, leading to excessive storage fees and decreased turnover rates. In both cases, the organization experiences decreased operational efficiency and profitability.

However, by generating accurate forecasts, manufacturers can prepare their systems to optimize production and fulfill customer demand. There are several ways to conduct production forecasting, including-

Trend

Businesses that experience consistent outcomes and demands can use the trend analysis to develop forecasts. For example, if a company experiences a 1% increase in orders each month for over a year, it can assume the trend will continue.

This method generates an accurate forecast as long as the trend remains stable. However, some trends may vary, in which case management must re-calculate their forecasts to fine-tune the estimate.

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Pattern

If management can define seasonal or monthly pattern changes, they can formulate a more accurate forecast. Patterns usually develop during events or seasonal changes, such as holidays, weather, or busy months.

For example, companies may find their orders increase during August due to back to school shopping. Product managers can use this pattern to forecast the demand for the following year.

Cycles

Cycles refer to long-term variations based on the fluctuating market and economy. If a business is at the beginning of an economic expansion, they may experience heightened demand for an extended period.
However, when the cycle ends, demand may plummet. Therefore, management needs to align economic cycles with the company trends and patterns to get an accurate estimate.

Inventory

Companies must keep minimum inventory levels at all times to meet short-term demand. If stock levels are too high, companies should lower their production until inventory returns to a healthy level. Keeping excessive volumes of products on hand can limit operational efficiency, storage space, and inventory turnover rates.

Benefits of Production Forecasting

Aside from meeting demand, accurate production forecasting offers businesses several benefits, including-

Effective Production Planning

Traditional production planning relied on the reactive approach. However, with new forecasting tools, companies can prepare their systems and produce high-demand items ahead of time to streamline sales and promote profits.

Production managers can create schedules that organize vendor deliveries, operations, and shipments to avoid supply chain disruptions.

Improved Inventory Management

With accurate forecasts, companies can optimize their inventory levels to reduce excessive fees and promote profits. Forecasting tools can alert manufacturers when demand decreases, allowing them to slow production and minimize stock levels.

It can also detect emerging demand surges so companies can begin stocking up goods to fulfill future orders. By enhancing inventory management, organizations can optimize the usage of the warehouse, storage, and workspaces.

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Cost Reduction

Aside from reducing inventory costs, an accurate forecast can help companies reduce operational expenses and material waste. For example, a company that over orders materials when demand is slowing will drive costs and receive a surplus of merchandise, resulting in excessive storage expenses or wasted resources.

With better estimation, the business could have limited production and invested funds in another supply chain operation.

Optimized Logistics

By collaborating the demand of all product lines, businesses can consolidate shipments to save on delivery and handling costs. Preparing systems ahead of time enables companies to avoid expedited shipping fees. This gives organizations a competitive advantage over companies that are unable to anticipate demand trends.

Increased Customer Satisfaction

Without proper inventory management and logistical planning, businesses can experience shipment delays, resulting in late customer deliveries. This can negatively impact customer satisfaction, loyalty, and advocacy. However, utilizing forecasts enables companies to streamline production to fulfill requests and promote sales.