The cost of forecast can be measured using the

Total Relevant Cost Equation (TRCE) for inventory

The components of the TRCE are:

1.       Procurement cost

2.       Holding cost of regular inventory

3.       Holding cost of safety stocks

4.       Stock out costs

Procurement and regular inventory holding costs though significant are minor to firms when compared to

Holding costs fall into four major categories:

·         Cost of Capital (largest of four)

·         Storage Costs (easier to determine)

·         Obsolescence Cost

·         Insurance and Taxes

·         Short-range forecast

o   Up to 1 year; usually less than 3 months

o   Job scheduling, worker assignments

o   More Accurate and uses math techniques

·         Medium-range forecast

o   3 months to 3 years

o   Sales & production planning, budgeting

o   Mostly math techniques

·         Long-range forecast

o   3+ years

o   New product planning, facility location

·         Economic forecasts

o   Address business cycle, e.g., inflation rate, money supply etc.

·         Technological forecasts

o   Predict technological change

o   Predict new product sales

·         Demand forecasts

o   Predict existing product sales

Determine the use of the forecast

Select the items to be forecast

Determine the time horizon of the forecast

Select the forecasting model(s)

Gather the data

Make the forecast

Validate and implement results

Quantitative- have demand data

Qualitative-no data

¨       Jury of executive opinion

o   Pool opinions of high-level executives, sometimes augment by statistical models

¨       Sales force composite

o   Estimates from individual salespersons are reviewed for reasonableness, then aggregated

¨       Delphi method

o   Panel of experts, queried iteratively

¨       Consumer Market Survey

o   Ask the customer

Time-Series Models

Associative Models

Moving Average

Exponential Smoothing

Trend Projection