Forecasting in Operations Management

Forecasting in Operations Management

Forecasts in business are the basic entities used in decision making process of operation management because they give information and details regarding future demands. According to Lawrence & Klimberg (2011) forecasting in any given business in terms of revenue, expenses and other financial planning during the startup stage is really more of art and even at times a gamble than science. Probably the most important, suitable financial forecasts will help a business develop operational as well as staffing plans. These plans will help make the business a success.

Case Study: Highline Financial Services

Highline Financial Services is a good example of startup that does not have enough data to develop a concrete and more relative estimation for the future financial performance. However, having been in business for the past two years, it is possible to make predictions and forecasts for the next fiscal year (4 quarters). In order to develop a logical and reasonable forecasts it important to analyze the performance of the services in the last two years. 

Analysis of last performance

Highline Financial Services has three lines of services and the three lines have been experiencing different demand in the market during different times of the year.  The table below is a breakdown of their performance from the last two years. 

Table 1 Annual performance of each service

    SERVICE  
YEAR QUARTER A B C QUARTERLY TOTALS
1 1 60 95 93 248
2 45 85 90 220
3 100 92 110 302
4 75 65 90 230
SERVICE TOTALS   280 337 383  
TOTAL DEMAND         1000

 

    SERVICE  
YEAR QUARTER A B C QUARTERLY TOTALS
2 1 72 85 102 259
2 51 75 72 198
3 112 85 110 307
4 85 50 100 235
SERVICE TOTALS   320 295 384  
TOTAL DEMAND         999

 

Annual performance analysis

Year1

During the first quarter of the first year, all the categories of the business performed relatively well especially comparing it with the first quarter of the second year. The total demand during the first year was 999. Out of this, the third quarter had the highest demand of 302 while the second quarter had the least demand of 202.  Service A seems to perform poorly during the first quarter of both years but performs best during the third quarter of all the years. 

Year 2

The second year experiences almost the same trend as the first year with a little difference in individual services. Important to note is the total demand for all the services. There was a difference of 1. During the first year, the total demand was 1000 and this reduced to 999 in the second year.  The third quarter of the year had the highest demand of 307 while the second quarter had the least demand of 198.   

Services performance analysis

Service A

Service A dropped by 15 from the first quarter in the second quarter but increased by a surprising 55 during the third quarter. The same service dropped by 25 during the last quarter of the fiscal year. In general, service B had a total demand of 288 during that first fiscal year. 

Service B

Service B on the other hand seems to be consistent in its performance except for the second quarter of the year where like other services, service B dropped from 95 to 85. However, during the third quarter, service B boosted its demand to 92 but dropped in the last quarter to 65. In general, service B had a total demand of 337.  

Service C

Service C seems to be the favorite in the marketing considering that it recorded the highest demand in both years. During the first quarter of the first year, service C recorded a demand of 93 and this demand rose during the same quarter of the second year to 102.  However, the second year of the first year dropped to 90 and the fall was worse during the second quarter of the second year from 102 to 72.During the third quarter of year 1, service C was 110 which was also repeated the same period in the second year. During the last quarter of a year 1, the demand dropped to 90 but the fall was less during the second which dropped to 100 from 110. In total, service had a total demand of 383 in the first year and improved by 1 to 384 in the second year. 

Forecast for the third year

Performance of the next fiscal year can best be obtained by taking the average of the two years for each service in each quarter. With that in mind, the average for each service has been calculated below in table 2. The forecast is made in consideration that the market situation will not change within the next 4 quarters. Other factors that have not been considered include marketing, promotion, competition among others. The forecast is based purely on the trend within the market in the past two years. The performance of each service is expected to have very minimal difference. According to Bergfeld (2015) it is practical but at the same time risky for a business to make forecasts based on short term performance. However, the market seems to have embraced the services and therefore the trend is expected to remain the same. 

Table 2 Forecast for year 3

    SERVICE  
YEAR QUARTER A B C QUARTERLY TOTALS
3 1 66 90 97.5 253.5
2 48 80 81 209
3 106 88.5 110 304.5
4 80 57.5 95 232.5
SERVICE TOTALS   300 316 383.5  
TOTAL DEMAND         999.5

 

General Observation

From the past performance, the demand is lowest during the second quarter of the year and the highest during the third quarter. This indicates the off pick season for the business and therefore this season should be well maximized. In addition, service A seems to be inconsistent in its performance. A market research should be carried out to establish the cause of irregular infatuation. 

The managing partner needs to be concerned about two main things. One is the number of employees working throughout the year. Considering that during the third quarter is when the sales are highest, the company should opt to have few permanent employees and other temporary employees to cover up the demand during the pick season in the third quarter. According to Norton & Ivanovic (2008) maintaining a high number of employees during low pick season can be a challenge to any business. It is easier to work with a little less number of employees while others serve as casuals. 

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