Forecasting Techniques

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary reason for monitoring forecast errors?

To compare the forecast with the actual value

To determine if the forecast is performing satisfactorily (correct)

To modify the forecast method

To calculate the mean absolute deviation

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

Too few or too many resources, and wrong timing of output

Too little or too much output, and wrong output

Too few or too many resources, too little or too much output, and wrong output

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

What is the formula for calculating the forecast error?

Error = (Actual - Forecast) / 2

Error = Forecast - Actual

Error = (Forecast - Actual) ^ 2

Error = Actual - Forecast (correct)

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

Negative error Signup and view all the answers

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

To summarize historical errors Signup and view all the answers

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

MSE weights errors according to their squared values Signup and view all the answers

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 Signup and view all the answers

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

((A - F) / A) x 100 Signup and view all the answers

What is the primary objective of forecasting in business?

To cope with the impact of the future's uncertainty Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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

The level of detail required in the forecast Signup and view all the answers

What is a characteristic of a good forecast?

It is timely and expressed in meaningful units Signup and view all the answers

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

To get rid of outliers and obviously incorrect data Signup and view all the answers

What happens to forecast accuracy as the time horizon increases?

It decreases Signup and view all the answers

What is the final step in the forecasting process?

Make the forecast Signup and view all the answers

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.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

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.