How a product's life cycle affects the forecasting process and using prediction and explanation to increase accuracy. In last month's column, we introduced the concept of forecasting and showed its importance to production and inventory control. We forecast because of capacity lag, since it takes longer for us to add capacity than it does for customers to change their minds and buying habits. In this column, we continue our examination of forecasting by looking at exactly what we are forecasting and the difference between prediction and explanation.
Forecasting involves looking at the future based on our experiences with the past.
This last category is important because it introduces a new, often overlooked, role. When we forecast, we should try to determine what new technologies will affect us and when we should adopt them. With product life cycles shrinking and new technologies proliferating, technological forecasting is becoming more important. For now, however, we will limit our scope to demand forecasting for existing products. In trying to forecast demand, we must recognize that it is not simply a matter of extending the past into the future.