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Magazine Chapter 4: Q23OQ (page 481)
Question: After using your forecasting model for six months, you decide to test it using MAD and a tracking signal. Here are the forecast and actual demands for the six months;
Period | Forecast | Actual |
May | 450 | 500 |
June | 500 | 550 |
July | 550 | 400 |
August | 600 | 500 |
September | 650 | 675 |
October | 700 | 600 |
a. Find the tracking signal.
b. Decide whether your forecasting routine is acceptable.
Short Answer
Forecasting is the act of predicting demand, supply, and pricing within an industry. It involves investigating the competition, collecting supplier data, and analysing past patterns to predict the future of an industry.
Step by step solution
(a)Tracking signal
A tracking signal could be a measurement that indicates whether the forecast averageis keeping pace with any genuine upward or downward changes in demand. When a forecast is consistently low or high, it's noted as a biased forecast.
A tracking signal (TS) can be calculated using the arithmetic sum of forecast deviations divided by the mean absolute deviation:
TS = RSFE/MAD
RSFE = the running sum of forecast errors, considering the nature of the error. (For example, negative errors cancel positive errors and vice versa.)
MAD = the average of all the forecast errors (disregarding whether the deviations are positive or negative). It is the average of the absolute deviations.
TS = -225/79.17 = -2.84
TS (Tracking signal) of October month is -2.84, the TS of other months is shown in column (9) of the table shown below:
(b) Acceptability of forecasting routine
The TS itself is acceptable. However, you'd prefer to see the TS going back and forth between positive and negative. It's been headed primarily downward since June. If this trend continues, the forecasts are unacceptable. This forecast should be closely monitored to work out if the downward trend continues, or if this occurred by random chance.
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