Question

Explain the importance of selecting the proper planning horizon in forecasting.

Answer 1

Selection of proper planning horizon in forecasting is important as the period for forecasting determines the type of methodology used for forecasting. Different functions in business work require different planning horizons. For example, sales and supply of raw materials need to be forecasted in short term like period of 3 months to one year. Other functions like hiring, budget planning and starting new partnerships may require strategy formulation with forecasting for 1 to 2 years i.e, medium horizon. Some functions like new product development, capacity expansion etc. can take more time and the forecasting of resources will have long term horizon upto 5-10 years.

Forecasting done on short horizon are more accurate and use quantitative methods while long term horizon forecasting use qualitative methods. Planning involves use of forecasting for different functions depending on the type of functions and planning horizon. Thus, forecasting techniques, level of dependency on forecasts and accuracy of forecasts depend on planning horizon and the type of activity.