Describe a situation where it would be appropriate to use forecasting. Be sure to include all the necessary steps to develop the forecast and why you would use the forecast you chose. Please be thorough and provide enough detail to allow meaningful responses from your classmates.
Business Statistics: Forecasting
Forecasting is important in the analysis of business trends. Forecasting makes use of past and present data to predict future trends. Forecasting can be used in inventory control. Inventory control aims at achieving an optimal level of stock in the business. The optimal level can be defined as the level where the business has sufficient supplies to cater for future demands, and the right amounts that minimize stock carrying costs. Manufacturers, wholesalers and even retailers need to establish stock levels at which they can replenish their inventory. Forecasting can help in establishing optimal stock levels in the business (Hyndman & Athanasopoulos, 2014). .
The first step is to identify lead time. Lead time can be defined as the time duration between making an order and the time the order reaches the premises. Since there may be unforeseen events that may delay delivery of products to the premises, a safety stock is often maintained. Safety stock refers to extra stock that the business keeps for such unforeseen emergencies. The reorder point can be given by the equation: Reorder point = lead time demand + safety stock. Lead time demand is given by the product of forecasted daily unit sales and the number of lead time days. Safety stock can be maintained at a particular percentage of the lead time demand.
In order to establish the reorder point, daily unit sale forecasts must be made. This can be established by examining historical sales figures for the business. The exact number can also be known especially for businesses that rely on standing orders from clients. Other factors such as seasonal fluctuations in demand are also taken into consideration. From the above, the reorder amount can be established. The reorder amount gives the amount of stock or raw materials that the business should order. This can be calculated as:
Reorder amount = , where au is the annual demand, oc the order cost, and acc the carrying cost per unit.
Hyndman, R. J., & Athanasopoulos, G. (2014). Forecasting: Principles and practice. Heathmont, Vic.: OTexts.
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