The articles on forecast based planning prescribed in the course opened my eyes to the various shortcomings of such a methodology. On numerous occasions in the past, I had always relied on forecasts such as trend analysis and regression models to arrive at solutions for the future. The thought of questioning such a method never occurred to me as it was something which I always believed to be reliable.
The article titled “Forecasting- Myths and Reality” elaborated on how forecasting can be unreliable and pointed out its shortcomings. Given the various uncertainties associated with the future, any forecast can hardly be termed reliable. These uncertainties include the effect of people in the system whose behavior is random and based on instinct. Trying to predict human behavior is a futile exercise and since most plans made by organizations involve some level of human contact (internal or external), plans based on forecasting methods must be taken with a pinch of salt.
Inspite of the above stated shortcomings of forecast based planning, it is important to note that forecasting cannot be completely done away with. Hence, it is important to work within the constraints of such a method. The first step in developing a forecast should be in understanding the problem at hand and clearly defining it.
Having defined the problem, the time frame of planning should be considered. The forecasts can be segregated into various time frames – short term, medium term and long term. Such a breakup of the future period into different phases makes sense as different time periods have different requirements and needs. Taking these variables into considerations, a suitable tool to forecast must be selected. These steps, I believe, will help an organization use forecast based planning in a more structured manner and reduce the occurrence of error. However, success will depend on a lot more factors such as taking educated risks, being able to recognize patterns and ensuring effective action is taken in anticipation of these uncertainties.
Size of firm- an additional variable
Another perspective which I developed during the course of the discussion was that the size of the firm in question is also an important variable. As firms get larger, the number of products and markets served, the level of technological sophistication required and the complex economic systems involved often exceed the rationality and grasp of a manager. Large size firms will have greater uncertainty when it comes to predicting the future as there are many more factors which affect it – both internal and external. This additional factor of size of firm was ignored in the articles.
Such an in depth understanding into the forecast based planning methodology coupled with its limitations also went on to help me better appreciate the Scenario based approach to planning. The scenario based approach tries to tackle the drawbacks of forecast based planning as stated above and I personally believe that it is a more holistic approach to planning.
2 comments:
I do agree with the fact that many forecasting models are highly inaccurate. Besides inaccurate models and human errors, a few other factors can also cause this. One such factor is the volatile market conditions. Economies of the world are going through turbulent times like never before. The economic climate can affect all three planning horizons mentioned here, though to different extents. Companies do try to account for this factor depending upon various predictions given out by experts or consulting firms. Now that globalization is on the rise, you wouldn’t be surprised if your business plan suffers because of an economic imbalance in another corner of the world which you had not factored in your plan. Another factor which many people do not account for while making forecasts is the human resource aspect of it which was been captured really well here. Interestingly, a manager's approach to these two problems is quite different. With respect to market conditions, they accept that there is nothing much that they can do and about the human resource aspect of it though they can make some difference, they hardly care!!!
It is a widely accepted fact that there will always be an error in forecasting. No forecasting model is without flaws. These flaws tend to increase when the horizons are increased. But then again there is hardly any substitute to get any closer to predicting the future. The trick lies in keeping these flaws in mind, working within these constraints and taking congnizance of the fact that it could all come crashing down like the stock markets, hence there has to be a contigency plan.
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