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Questions and Answers
What is the primary reason for monitoring forecast errors?
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?
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?
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?
What type of error results when the forecast is too high?
What is the purpose of using measures such as MAD, MSE, and MAPE?
What is the purpose of using measures such as MAD, MSE, and MAPE?
What is the key difference between MSE and the other two measures?
What is the key difference between MSE and the other two measures?
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?
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?
What is the calculation for the mean absolute percent error (MAPE)?
What is the calculation for the mean absolute percent error (MAPE)?
What is the primary objective of forecasting in business?
What is the primary objective of forecasting in business?
What assumption do forecasting techniques generally make?
What assumption do forecasting techniques generally make?
Why are forecasts for groups of items generally more accurate than forecasts for individual items?
Why are forecasts for groups of items generally more accurate than forecasts for individual items?
What should be considered when determining the purpose of the forecast?
What should be considered when determining the purpose of the forecast?
What is a characteristic of a good forecast?
What is a characteristic of a good forecast?
Why is it important to 'clean' the data obtained for forecasting?
Why is it important to 'clean' the data obtained for forecasting?
What happens to forecast accuracy as the time horizon increases?
What happens to forecast accuracy as the time horizon increases?
What is the final step in the forecasting process?
What is the final step in the forecasting process?
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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.
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