Forecasting

A company wants to calculate the tracking signal for a certain product. Over a 4-month period, the forecast errors were 0.87, 1.38, -1.48, and -1.36. The resulting MAD is 1.27 units. What is the tracking signal?

-0.46 The tracking signal is the algebraic sum of forecast errors divided by the MAD. Note that the algebraic sum uses negative numbers, not absolute values. 0.87 + 1.38 + (-1.48) + (-1.36) = -0.59; -0.59/1.27 = -0.46.

A company wants to calculate the extent of forecast error using mean absolute deviation (MAD). Over a four-month period, the absolute forecast errors were 0.87, 0.38, 0.48, and 1.36. What is the MAD for this period?

0.77 units MAD is calculated by taking the sum of absolute errors and dividing that total by the number of periods. In this situation, the sum of the absolute forecast errors is 3.09, which is then divided by 4 to yield a MAD of 0.77 units.

Which of the following correctly identifies an effect of using moving average forecasts?

A moving average forecast smooths out random variations. The simple moving average can be useful when demand is relatively constant from period to period. The method can be used to prevent an overreaction to a random or irregular spike or dip in a given month because it smooths out these variations.

Which of the following could have the unintended consequence of increasing demand variability for an organization's product or service?

Culture of optimism in demand forecasting Demand plan error, such as incorrectly estimated results of marketing activities, and forecasting bias, such as from a culture of overly optimistic demand forecasting, are types of demand variability that directly contribute to supply variability because they result in producing too many or too few products or the wrong product family mix. This can create an excess of inventory that is not in demand and a shortage of inventory in demand.

When collecting input data from customers for sales forecasting, what could cause significant forecast error if omitted?

Data on sales returns Forecasting needs to be based on an estimate of actual demand rather than on customer orders. Customer orders are often the starting point for estimating demand, but they should not be the ending point. For example, customer orders need to be modified to account for returns.

A demand forecast determined by a panel of all the salespeople in an organization may reach an exaggerated, false conclusion due to which of the following situations?

Groupthink effect Groupthink can distort the conclusions of a panel if a strong leader emerges with a convincing but wrong-headed view or if all participants reinforce one another in reaching an exaggerated conclusion. An entire sales force acting in concert may, however, benefit from experience, collective knowledge of the broad market served by the organization, and even intuition.

Forecasts are more accurate for which of the following?

Product families The more aggregate the forecast, the more accurate. Long-term forecasts are less accurate than short-term forecasts. End-use components are calculated, not forecasted.

Which of the following statements identifies a beneficial result of including more periods in a moving average?

The impact of random variations is reduced. Including more periods in the calculation (six or 12 months instead of three, for example) further reduces the effects of random variation. This is the only benefit. Otherwise, the data gathering and calculations become more difficult and the forecasts lag further behind changes in demand, making the forecasts less sensitive to trends and cycles.

Which of the following statements correctly identifies the purpose of the weights in a weighted moving average?

To be more sensitive to recent trends in demand A weighted moving average puts more emphasis on the most recent demand numbers than a simple moving average does. Because of the weighting, it doesn't lag as far behind demand data as a simple moving average does. Its focus is on recent trends, not the long term.

Which of the following is a leading economic indicator?

yield curve The line that results from plotting, at a certain time, the market interest rates of a financial instrument (for instance, a bond) over a range of maturity dates is called a yield curve. Changes to the yield curve usually accurately predict economic swings.

Demand forecasts are likely to be most accurate for which of the following items?

All cars (all full-size cars, all hybrid models, all SUV models) The forecast accuracy is likely to be greatest for all cars. The larger the aggregation, the more accurate the forecast.

The impact of seasonality on demand in a fast-food restaurant might be measured in which of the following ways?

All of the above: time of year, day of the week, house of the day As a demand planning concept, "seasonality" refers to demand patterns influenced by time, not just by the four seasons of the year. The restaurant business varies with the calendar, the day of the week, and the time of day.

Which of the following is a leading economic indicator?

Initial unemployment insurance claims Initial unemployment insurance claims is a leading economic indicator. Lagging economic indicators include the average duration of unemployment, changes in company profits, and outstanding business and commercial loans.

If safety stock levels are calculated using normal distributions related to historical demand and 68.27% of days will have demand within +/- 1 standard deviation, calculating safety stock as a function of +/- 2 standard deviations will:

have almost as good a customer service level as +/- 3 standard deviations at a lower cost. Under a normal distribution, +/- 1 standard deviation would be 68.27% of all observations, +/- 2 standard deviations would be 95.45% of all observations, and +/- 3 standard deviations would be 99.73% of all observations. The difference between two and three standard deviations is minimal, as opposed to the 68% at +/- 1 standard deviation, and the customer service level attained at two standard deviations would be almost as good as that attained at three.

A statistical forecast should be:

one of many inputs to demand plans. A quantitative (intrinsic) forecast is intended as a frame of reference for further planning, and thus it should be combined with forecasts using extrinsic data on trends and modified using qualitative data such as expert opinions.