Forecasting Techniques

16 Questions

What is the primary reason for monitoring forecast errors?

To determine if the forecast is performing satisfactorily

What is the impact of inaccurate forecasts on an organization's schedules?

All of the above, and additional costs, dissatisfied customers, and management issues

What is the formula for calculating the forecast error?

Error = Actual - Forecast

What type of error results when the forecast is too high?

Negative error

What is the purpose of using measures such as MAD, MSE, and MAPE?

To summarize historical errors

What is the key difference between MSE and the other two measures?

MSE weights errors according to their squared values

What is the result of having a forecast error of 10, given an actual demand of 100 units and a forecast demand of 90 units?

The forecast was too low

What is the calculation for the mean absolute percent error (MAPE)?

((A - F) / A) x 100

What is the primary objective of forecasting in business?

To cope with the impact of the future's uncertainty

What assumption do forecasting techniques generally make?

That the same underlying causal system that existed in the past will continue to exist in the future

Why are forecasts for groups of items generally more accurate than forecasts for individual items?

Because forecasting errors among items in a group usually have a canceling effect

What should be considered when determining the purpose of the forecast?

The level of detail required in the forecast

What is a characteristic of a good forecast?

It is timely and expressed in meaningful units

Why is it important to 'clean' the data obtained for forecasting?

To get rid of outliers and obviously incorrect data

What happens to forecast accuracy as the time horizon increases?

It decreases

What is the final step in the forecasting process?

Make the forecast

Study Notes

Forecasting

Forecasting is the practice of predicting future events by considering past and present events, helping businesses cope with future uncertainty.
It is a decision-making tool that examines historical data and trends.

Features Common to All Forecasting Techniques

Assume that the underlying causal system that existed in the past will continue to exist in the future.
Forecasts are not perfect and allow for forecast errors.
Forecasts for groups of items tend to be more accurate than forecasts for individual items due to canceling effects of errors.

Elements of Good Forecast

Forecast should be timely.
Forecast should be accurate, with stated degree of accuracy.
Forecast should be reliable and consistent.
Forecast should be expressed in meaningful units.
Forecast should be in writing.
Forecasting technique should be simple to understand and use.
Forecast should be cost-effective, with benefits outweighing costs.

Steps in the Forecasting Process

Determine the purpose of the forecast and its required level of detail, resources, and accuracy.
Establish a time horizon, considering that accuracy decreases as the time horizon increases.
Obtain, clean, and analyze appropriate data.
Select a forecasting technique.
Make the forecast.
Monitor forecast errors to determine if the forecast is performing satisfactorily.

Forecast Accuracy

Accurate forecasts are necessary for daily business activities.
Inaccurate forecasts can lead to additional costs, dissatisfied customers, and management issues.
Forecast error is the difference between the actual value and the predicted value for a given time period (Error = Actual - Forecast).
Positive errors result from forecasts that are too low, while negative errors result from forecasts that are too high.

Measures of Forecast Error

Mean Absolute Deviation (MAD) weights all errors evenly.
Mean Squared Error (MSE) weights errors according to their squared values.
Mean Absolute Percent Error (MAPE) weights errors according to relative error.

Example of Calculating Forecast Errors

Given a table of actual and forecast values, calculate the error, absolute error, error squared, and mean absolute percent error for each period.

Learn about the basics of forecasting, a decision-making tool used to predict future events based on past and present data. Understand the key features and assumptions of forecasting techniques.

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