3.3 Forecasting Horizons and Their Applications

The selection of an appropriate forecasting horizon is crucial for effective decision-making within an organization. Forecasting horizons can be broadly categorized into three distinct temporal scopes: long-term, medium-term, and short-term.

Long-Term Forecasting (LT)

Long-term forecasting, typically encompassing a timeframe exceeding two years, is often undertaken at the strategic level of an organization. Due to the inherent high degree of uncertainty associated with such extended timeframes, this approach necessitates a deep understanding of the target products and markets. Long-term forecasts are particularly relevant for strategic decisions concerning new product launches, implementing emerging technologies, and establishing new facilities. Notably, the absence of historical data often presents a significant challenge in long-term forecasting, requiring a greater reliance on expert judgment and scenario planning techniques.

Medium-Term Forecasting (MT)

Medium-term forecasting, also referred to as intermediate-term forecasting, typically spans from several months to two years into the future. This timeframe allows for the utilization of both quantitative and qualitative forecasting methodologies. Medium-term forecasts are instrumental in tactical decision-making, informing strategic initiatives and operational planning.

Short-Term Forecasting (ST)

Short-term forecasting focuses on a timeframe ranging from daily to a few months. These forecasts are primarily employed for operational decision-making processes, such as inventory management, production scheduling, and workforce allocation. Quantitative methods, particularly time series analysis, are prominently used in short-term forecasting due to their effectiveness in analyzing and extrapolating from historical data.

“3 Forecasting” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted. Modifications: Forecasting horizons section used and expanded on.