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Anonymous
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Asked: 2019-12-27T14:16:55+00:00 In:

What is forecasting horizons?

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In forecasting, the term forecasting horizons is quite often used.

Forecasting horizons are divided into short, medium and long terms. But what makes them different from each other, and what are their needs and uses?

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    2 Answers

    1. Level 2
      This answer was edited.

      There are three forecasts horizons.

      Forecasts Horizons 

      Long term forecast horizons

      • Over three years into the future
      • Can be used for R&D, plant location, product planning etc
      • Principally based on judgements

      Medium-term forecast horizons

      • From one season to three years
      • It can be used for aggregate planning, capacity planning, sales forecasts etc
      • A mixture of quantitative methods and judgement

      Short term forecast horizons

      • It can be from a daily to annual; can be less than one season
      • It can be applied for demand forecasting, staffing levels, purchasing, inventory levels
      • Quantitative methods

      Forecasting needs and Uses

      Forecasting is used across almost all industries. Below are some of the sample uses in short terms forecast horizons.

      Management of existing resources

      • How many employees do we need and when?
      • How much product should we make in anticipation of demand?

      Acquiring additional resources

      • When are we going to run out of capacity?
      • How many more people will we need?
      • How large will our back-orders be?

      Determining what resources are needed

      • What kind of machines will we require?
      • Which services are rising/falling in demand?
      • What kind of people should we be hiring?
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    3. Level 2

      The forecast time period can help to determine what approach to take.

      • Predicting short term (1 to 3 months ahead) price, supply and demand movements can be achieved through regular feedback from market players – traders/buyers/suppliers. Lead times, stock movements, trade flows, latest market developments (bad weather, major buyers in the market, transport bottlenecks) all help to provide a good indication of short term price movements.
      • In the medium-term forecast horizon, supply/demand balance models can help to predict if a market will be in surplus or deficit. News flow is used to build up supply projections. Companies often announce projects in the pipeline with details of capacity, product range, start updates etc. Future demand projections for the manufacturing industry are dependent on the macro-economic outlook, with forecasts on industrial production (IP), automotive and construction sectors the key drivers.
      • In the long term forecasting horizon, the further out the projection the wider the margin for error. However, long term (20, 30 and 50 years ahead) forecasts are especially important for industries. The cost of building a new plant can run into billions of dollars, often involving massive outlay on infrastructure to support the project throughout its life cycle. Long-term price forecasts are often formed from cost modelling a particular product. Through constructing an industry cost curve a company is able to benchmark its project against its competitors. Moreover, the highest marginal cost producer will set the long term market-clearing price of a product.
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