Chapter 7

Demand Forecasting in a Supply Chain

True/False
1.

The forecast of demand forms the basis for all strategic and planning decisions in
a supply chain.
Answer: True
Difficulty: Moderate

2.

Throughout the supply chain, all pull processes are performed in anticipation of
customer demand, whereas all push processes are performed in response to
customer demand.
Answer: False
Difficulty: Easy

3.

For pull processes, a manager must forecast what customer demand will be in
order to plan the level of available capacity and inventory.
Answer: True
Difficulty: Moderate

4.

For push processes, a manager must forecast what customer demand will be in
order to plan the level of available capacity and inventory.
Answer: False
Difficulty: Hard
The resulting forecast accuracy enables supply chains to be both more
responsive and more efficient in serving their customers.

5.

The result when each stage in the supply chain makes its own separate forecast
is often a match between supply and demand, because these forecasts are often
very different.
Answer: False
Difficulty: Moderate

6.

When all stages of a supply chain produce a collaborative forecast, it tends to be

much more accurate.
Answer: True
Difficulty: Easy

7.

Leaders in many supply chains have started moving toward collaborative

forecasting to improve their ability to match supply and demand.
Answer: True
Difficulty: Moderate

8.

Mature products with stable demand are usually the most difficult to forecast.
Answer: False
Difficulty: Moderate

9.

Forecasting and the accompanying managerial decisions are extremely difficult

when either the supply of raw materials or the demand for the finished product is
highly variable.
Answer: True
Difficulty: Easy

10.

Forecasts are always right.

Answer: False
Difficulty: Easy

11.

Forecasts should include both the expected value of the forecast and a measure
of forecast error.
Answer: True
Difficulty: Moderate

12.

Long-term forecasts are usually more accurate than short-term forecasts.

Answer: False
Difficulty: Moderate

13.

Aggregate forecasts are usually more accurate than disaggregate forecasts, as

they tend to have a smaller standard deviation of error relative to the mean.
Answer: True
Difficulty: Moderate

14.

In general, the further up the supply chain a company is (or the further they are
from the consumer), the smaller the distortion of information they receive.
Answer: False
Difficulty: Easy

15.

Collaborative forecasting based on sales to the end customer can help

enterprises further up the supply chain reduce forecast error.
Answer: True
Difficulty: Moderate

16.

Qualitative forecasting methods are most appropriate when there is good

historical data available or when experts do not have market intelligence that is
critical in making the forecast.
Answer: False
Difficulty: Moderate

17.

Time series forecasting methods are based on the assumption that past demand
history is a good indicator of future demand.
Answer: True
Difficulty: Easy

18.

Time series forecasting methods are the most difficult methods to implement.
Answer: False
Difficulty: Moderate

19.

Causal forecasting methods find a correlation between demand and

environmental factors and use estimates of what environmental factors will be to
forecast future demand.
Answer: True
Difficulty: Moderate

20.

Simulation forecasting methods imitate the consumer choices that give rise to
demand to arrive at a forecast.
Answer: True
Difficulty: Moderate

21.

The objective of forecasting is to filter out the random component (noise) and
estimate the systematic component.
Answer: True
Difficulty: Moderate

22.

The forecast error measures the difference between the forecast and the
estimate.
Answer: False
Difficulty: Easy

23.

The goal of any forecasting method is to predict the systematic component of

demand and estimate the random component.
Answer: True
Difficulty: Moderate

24.

A static method of forecasting assumes that the estimates of level, trend, and
seasonality within the systematic component vary as new demand is observed.
Answer: False
Difficulty: Easy

25.

In adaptive forecasting, the estimates of level, trend, and seasonality are updated
after each demand observation.
Answer: True
Difficulty: Moderate

26.

The moving average forecast method is used when demand has an observable
trend or seasonality.
Answer: False
Difficulty: Moderate

Multiple Choice
1.

The basis for all strategic and planning decisions in a supply chain comes from
a.
the forecast of demand.
b.
sales targets.
c.
profitability projections.
d.
production efficiency goals.
e.
all of the above
Answer: a
Difficulty: Easy

2.

For push processes, a manager must forecast what customer demand will be in
order to
a. plan the service level.
b. plan the level of available capacity and inventory.
c. plan the level of productivity.
d. plan the level of production.
e. none of the above
Answer: d
Difficulty: Moderate

3.

For pull processes, a manager must forecast what customer demand will be in
order to
a. plan the service level.
b. plan the level of available capacity and inventory.
c. plan the level of productivity.
d. plan the level of production.
e. none of the above
Answer: b
Difficulty: Moderate

4.

The result of each stage in the supply chain making its own separate forecast is
a.
an accurate forecast.
b.
a more accurate forecast.
c.
a match between supply and demand.
d.
a mismatch between supply and demand.
e.
none of the above
Answer: d
Difficulty: Moderate

5.

When all stages of a supply chain produce a collaborative forecast, it tends to be

a.
much more detailed.
b.
much more complex.
c.
much more accurate.
d.
much more flexible.
e.
all of the above
Answer: c
Difficulty: Moderate

6.

The resulting accuracy of a collaborative forecast enables supply chains to be

a.
more responsive but less efficient in serving their customers.

b.
both more responsive and more efficient in serving their customers.
c.
less responsive but less efficient in serving their customers.
d.
both less responsive and less efficient in serving their customers.
e.
None of the above are true.
Answer: b
Difficulty: Moderate
7.

Leaders in many supply chains have started moving

a.
toward independent forecasting to improve their ability to match supply
and demand.
b.
toward consecutive forecasting to improve their ability to match supply
and demand.
c.
toward sequential forecasting to improve their ability to match supply and
demand.
d.
toward collaborative forecasting to improve their ability to match supply
and demand.
e.
None of the above are true.
Answer: d
Difficulty: Moderate

8.

Production can utilize forecasts to make decisions concerning

a.
scheduling.
b.
sales-force allocation.
c.
promotions.
d.
new product introduction.
e.
budgetary planning.
Answer: a
Difficulty: Moderate

9.

Marketing can utilize forecasts to make decisions concerning

a.
scheduling.
b.
promotions.
c.
inventory control.
d.
aggregate planning.
e.
purchasing.
Answer: b
Difficulty: easy

10.

Finance can utilize forecasts to make decisions concerning

a. scheduling.
b. promotions.
c. plant/equipment investment.
d. aggregate planning.
e. purchasing.
Answer: a
Difficulty: Moderate

11.

Personnel can utilize forecasts to make decisions concerning

a. scheduling.
b. promotions.
c. plant/equipment investment.

d. workforce planning.
e. purchasing.
Answer: b
Difficulty: Moderate
12.

Mature products with stable demand

a.
are usually easiest to forecast.
b.
are usually hardest to forecast.
c.
cannot be forecast.
d.
do not need to be forecast.
e.
none of the above
Answer: a
Difficulty: Easy

13.

When either the supply of raw materials or the demand for the finished product is
highly variable, forecasting and the accompanying managerial decisions
a.
are extremely simple.
b.
are relatively straightforward.
c.
are extremely difficult.
d.
should not be attempted.
e.
none of the above
Answer: c
Difficulty: Easy

14.

One of the characteristics of forecasts is

a.
forecasts are always right.
b.
forecasts are always wrong.
c.
short-term forecasts are usually less accurate than long-term forecasts.
d.
long-term forecasts are usually more accurate than short-term forecasts.
e.
none of the above
Answer: b
Difficulty: Moderate

15.

One of the characteristics of forecasts is

a. aggregate forecasts are usually less accurate than disaggregate forecasts.
b. disaggregate forecasts are usually more accurate than aggregate forecasts.
c. short-term forecasts are usually less accurate than long-term forecasts.
d. long-term forecasts are usually less accurate than short-term forecasts.
e. none of the above
Answer: d
Difficulty: Moderate

16.

One of the characteristics of forecasts is

a. aggregate forecasts are usually more accurate than disaggregate forecasts.
b. disaggregate forecasts are usually more accurate than aggregate forecasts.
c. short-term forecasts are usually less accurate than long-term forecasts.
d. long-term forecasts are usually more accurate than short-term forecasts.
e. none of the above
Answer: a
Difficulty: Moderate

17.

Forecasts are always wrong and therefore

a.
should include both the expected value of the forecast and a measure of
forecast error.
b.
should not include both the expected value of the forecast and a measure
of forecast error.
c.
should only be used when there are no accurate estimates.
d.
should be missing the expected value of the forecast and a measure of
forecast error.
e.
none of the above
Answer: a
Difficulty: Easy

18.

Long-term forecasts are usually less accurate than short-term forecasts because
a.
short-term forecasts have a larger standard deviation of error relative to
the mean than long-term forecasts.
b.
short-term forecasts have more standard deviation of error relative to the
mean than long-term forecasts.
c.
long-term forecasts have a smaller standard deviation of error relative to
the mean than short-term forecasts.
d.
long-term forecasts have a larger standard deviation of error relative to
the mean than short-term forecasts.
e.
none of the above
Answer: d
Difficulty: Moderate

19.

Aggregate forecasts are usually more accurate than disaggregate forecasts

because
a.
aggregate forecasts tend to have a larger standard deviation of error
relative to the mean.
b.
aggregate forecasts tend to have a smaller standard deviation of error
relative to the mean.
c.
disaggregate forecasts tend to have a smaller standard deviation of error
relative to the mean.
d.
disaggregate forecasts tend to have less standard deviation of error
relative to the mean.
e.
none of the above
Answer: b
Difficulty: Easy

20.

In general, the further up the supply chain a company is (or the further they are
from the consumer),
a.
the greater the distortion of information they receive.
b.
the smaller the distortion of information they receive.
c.
the information they receive is more accurate.
d.
the information they receive is more useful.
e.
none of the above
Answer: a
Difficulty: Moderate

21.

Which of the following is not a forecasting method?

a.
qualitative

b.
time series
c.
causal
d.
simulation
e.
All of the above are forecasting methods.
Answer: e
Difficulty: Moderate
22.

Forecasting methods that are primarily subjective and rely on human judgment
are known as
a. qualitative forecasting methods.
b. time series forecasting methods.
c. causal forecasting methods.
d. simulation forecasting methods.
e. none of the above
Answer: a
Difficulty: Moderate

23.

Forecasting methods that use historical demand to make a forecast are known
as
a. qualitative forecasting methods.
b. time series forecasting methods.
c. causal forecasting methods.
d. simulation forecasting methods.
e. none of the above.
Answer: b
Difficulty: Moderate

24.

Forecasting methods that assume that the demand forecast is highly correlated
with certain factors in the environment (e.g., the state of the economy, interest
rates, etc.) to make a forecast are known as
a. qualitative forecasting methods.
b. time series forecasting methods.
c. causal forecasting methods.
d. simulation forecasting methods.
e. none of the above
Answer: c
Difficulty: Moderate

25.

Forecasting methods that imitate the consumer choices that give rise to demand
to arrive at a forecast are known as
a. qualitative forecasting methods.
b. time series forecasting methods.
c. causal forecasting methods.
d. simulation forecasting methods.
e. none of the above
Answer: d
Difficulty: Moderate

26.

Qualitative forecasting methods are most appropriate when

a.
there is good historical data available.
b.
there is little historical data available.

c.
experts do not have critical market intelligence.
d.
forecasting demand into the near future.
e.
trying to achieve a high level of detail.
Answer: b
Difficulty: Moderate
27.

Time series forecasting methods are most appropriate when

a.
there is little historical data available.
b.
the basic demand pattern varies significantly from one year to the next.
c.
the basic demand pattern does not vary significantly from one year to the
next.
d.
experts have critical market intelligence.
e.
forecasting demand several years into the future.
Answer: c
Difficulty: Hard

28.

Which forecasting methods are the simplest to implement and can serve as a
good starting point for a demand forecast?
a. qualitative forecasting methods
b. time series forecasting methods
c. causal forecasting methods
d. simulation forecasting methods
e. none of the above
Answer: b
Difficulty: Moderate

29.

Which of the following is not a step to help an organization perform effective

forecasting?
a.
Understand the objective of forecasting.
b.
Integrate demand planning and forecasting throughout the supply chain.
c.
Understand and identify customer segments.
d.
Identify and understand supplier requirements.
e.
Determine the appropriate forecasting technique.
Answer: d
Difficulty: Moderate

30.

The goal of any forecasting method is to

a.
predict the random component of demand and estimate the systematic
component.
b.
predict the systematic component of demand and estimate the random
component.
c.
predict the seasonal component of demand and estimate the random
component.
d.
predict the random component of demand and estimate the seasonal
component.
e.
predict the trend component of demand and estimate the random
component.
Answer: b
Difficulty: Moderate

31.

The multiplicative form of the systematic component of demand is shown as

a.
level trend seasonal factor.
b.
level + trend + seasonal factor.
c.
(level + trend) seasonal factor.
d.
level (trend + seasonal factor).
e.
(level trend) + seasonal factor.
Answer: a
Difficulty: Easy

32.

The additive form of the systematic component of demand is shown as

a. level trend seasonal factor.
b. level + trend + seasonal factor.
c. (level + trend) seasonal factor.
d. level (trend + seasonal factor).
e. (level trend) + seasonal factor.
Answer: b
Difficulty: Easy

33.

The mixed form of the systematic component of demand is shown as

a. level trend seasonal factor.
b. level + trend + seasonal factor.
c. (level + trend) seasonal factor.
d. level (trend + seasonal factor).
e. (level trend) + seasonal factor.
Answer: c
Difficulty: Hard

34.

Which of the following is not a necessary step to estimate the three parameters
level, trend, and seasonal factors of the systematic component of demand?
a.
Deseasonalize demand and run linear regression to estimate level and
trend.
b.
Estimate seasonal factors.
c.
Remove the trend factor of demand and run linear regression to estimate
seasonal factors.
d.
All of the above are steps.
e.
None of the above are steps.
Answer: c
Difficulty: Moderate

35.

A static method of forecasting

a.
assumes that the estimates of level, trend, and seasonality within the
systematic component do not vary as new demand is observed.
b.
assumes that the estimates of level, trend, and seasonality within the
systematic component vary as new demand is observed.
c.
the estimates of level, trend, and seasonality are updated after each
demand observation.
d.
All of the above are true.
e.
None of the above are true.
Answer: a
Difficulty: Easy

36.

In adaptive forecasting
a. there is an assumption that the estimates of level, trend, and seasonality
within the systematic component do not vary as new demand is observed.
b. the estimates of level, trend, and seasonality within the systematic
component are not adjusted as new demand is observed.
c. the estimates of level, trend, and seasonality are updated after each demand
observation.
d. All of the above are true.
e. None of the above are true.
Answer: c
Difficulty: Easy

37.

The moving average forecast method is used when

a. demand has observable trend or seasonality.
b. demand has no observable trend or seasonality.
c. demand has observable trend and seasonality.
d. demand has no observable level or seasonality.
e. none of the above
Answer: b
Difficulty: Moderate

38.

The simple exponential smoothing forecast method is appropriate when

a. demand has observable trend or seasonality.
b. demand has no observable trend or seasonality.
c. demand has observable trend and seasonality.
d. demand has no observable level or seasonality.
e. none of the above
Answer: b
Difficulty: Moderate

39.

The trend corrected exponential smoothing (Holts Model) forecast method is

appropriate when
a. demand has observable trend or seasonality.
b. demand has no observable trend or seasonality.
c. demand has observable trend but no seasonality.
d. demand has no observable level or seasonality.
e. none of the above
Answer: c
Difficulty: Moderate

40.

The trend and seasonality corrected exponential smoothing (Winters Model)

forecast method is appropriate when
a. demand has observable trend, level, and seasonality.
b. demand has no observable trend or seasonality.
c. demand has observable trend but no seasonality.
d. demand has no observable level or seasonality.
e. none of the above
Answer: a
Difficulty: Moderate

41.

Managers perform a thorough error analysis on a forecast for which of the

following key reasons?
a. To establish a closely linked systematic forecasting method to accurately
predict the level season component of demand.
b. To determine whether the current forecasting method is accurately predicting
the systematic component of demand.
c. In order to develop contingency plans that account for forecast error.
d. all of the above
e. b and c only
Answer: e
Difficulty: Moderate

42.

The measure of forecast error where the amount of error of each forecast is
squared and then an average is calculated is
a. mean squared error (MSE).
b. mean absolute deviation (MAD).
c. mean absolute percentage error (MAPE).
d. bias.
e. the tracking signal.
Answer: a
Difficulty: Moderate

43.

The measure of forecast error where the absolute amount of error of each
forecast is averaged is
a. mean squared error (MSE).
b. mean absolute deviation (MAD).
c. mean absolute percentage error (MAPE).
d. bias.
e. the tracking signal.
Answer: b
Difficulty: Moderate

44.

The measure of forecast error where the average absolute error of each forecast
is shown as a percentage of demand is
a. mean squared error (MSE).
b. mean absolute deviation (MAD).
c. mean absolute percentage error (MAPE).
d. bias.
e. the tracking signal.
Answer: c
Difficulty: Hard

45.

The measure of whether a forecast method consistently over- or underestimates

demand is
a. mean squared error (MSE).
b. mean absolute deviation (MAD).
c. mean absolute percentage error (MAPE).
d. bias.
e. the tracking signal.
Answer: d
Difficulty: Moderate

46.

The measure of how significantly a forecast method consistently over- or

underestimates demand is
a. mean squared error (MSE).
b. mean absolute deviation (MAD).
c. mean absolute percentage error (MAPE).
d. bias.
e. the tracking signal.
Answer: e
Difficulty: Hard

Essay/Problems
1.

Explain the role of forecasting in a supply chain.

Answer: The forecast of demand forms the basis for all strategic and planning
decisions in a supply chain. Throughout the supply chain, all push processes are
performed in anticipation of customer demand, whereas all pull processes are
performed in response to customer demand. For push processes, a manager
must plan the level of production. For pull processes, a manager must plan the
level of available capacity and inventory. In both instances, the first step a
manager must take is to forecast what customer demand will be. When each
stage in the supply chain makes its own separate forecast, these forecasts are
often very different. The result is a mismatch between supply and demand. When
all stages of a supply chain produce a collaborative forecast, it tends to be much
more accurate. The resulting forecast accuracy enables supply chains to be both
more responsive and more efficient in serving their customers. Leaders in many
supply chains, from PC manufacturers to packaged goods retailers, have started
moving toward collaborative forecasting to improve their ability to match supply
and demand.
Difficulty: Moderate

2.

Describe the basic characteristics of forecasts that managers should be aware.

Answer: Companies and supply chain managers should be aware of the
following characteristics of forecasts:
1. Forecasts are always wrong and should thus include both the expected value
of the forecast and a measure of forecast error. Thus, the forecast error (or
demand uncertainty) must be a key input into most supply chain decisions. An
estimation of demand uncertainty is unfortunately often missing from forecasts,
resulting in estimates that vary widely among different stages of a supply chain
that is not forecasting collaboratively.
2. Long-term forecasts are usually less accurate than short-term forecasts; that
is, long-term forecasts have a larger standard deviation of error relative to the
mean than short-term forecasts.
3. Aggregate forecasts are usually more accurate than disaggregate forecasts,
as they tend to have a smaller standard deviation of error relative to the mean.
The greater the degree of aggregation, the more accurate the forecast.

4. In general, the further up the supply chain a company is (or the further they are
from the consumer), the greater the distortion of information they receive. One
classic example of this is the bullwhip effect, where order variation is amplified as
orders move further from the end customer. As a result, the further up the supply
chain an enterprise exists, the higher the forecast error. Collaborative forecasting
based on sales to the end customer can help enterprises further up the supply
chain reduce forecast error.
Difficulty: Moderate
3.

Explain the four types of forecasting methods.

Answer: Forecasting methods are classified according to the following four types:
1. Qualitative: Qualitative forecasting methods are primarily subjective and rely
on human judgment. They are most appropriate when there is little historical data
available or when experts have market intelligence that is critical in making the
forecast. Such methods may be necessary to forecast demand several years into
the future in a new industry.
2. Time series: Time series forecasting methods use historical demand to make a
forecast. They are based on the assumption that past demand history is a good
indicator of future demand. These methods are most appropriate when the basic
demand pattern does not vary significantly from one year to the next. These are
the simplest methods to implement and can serve as a good starting point for a
demand forecast.
3. Causal: Causal forecasting methods assume that the demand forecast is
highly correlated with certain factors in the environment (e.g., the state of the
economy, interest rates, etc.). Causal forecasting methods find this correlation
between demand and environmental factors and use estimates of what
environmental factors will be to forecast future demand.
4. Simulation: Simulation forecasting methods imitate the consumer choices that
give rise to demand to arrive at a forecast. Using simulation, a firm can combine
time series and causal methods to answer such questions as: What will the
impact of a price promotion be? What will the impact be of a competitor opening
a store nearby?
Difficulty: Moderate

4.

Explain the basic, six-step approach to help an organization perform effective

forecasting.
Answer: The following basic, six-step approach helps an organization perform
effective forecasting:
1. Understand the objective of forecasting. The objective of every forecast is to
support decisions that are based on the forecast, so an important first step is to
clearly identify these decisions. Examples of such decisions include how much of
a particular product to make, how much to inventory, and how much to order. All
parties affected by a supply chain decision should be aware of the link between
the decision and the forecast. Failure to make these decisions jointly may result
in either too much or too little product in various stages of the supply chain.
2. Integrate demand planning and forecasting throughout the supply chain. A
company should link its forecast to all planning activities throughout the supply
chain. These include capacity planning, production planning, promotion planning,
and purchasing, among others. This link should exist at both the information

system and the human resource management level. As a variety of functions are
affected by the outcomes of the planning process, it is important that all of them
are integrated into the forecasting process. To accomplish this integration, it is a
good idea for a firm to have a cross-functional team, with members from each
affected function responsible for forecasting demandand an even better idea to
have members of different companies in the supply chain working together to
create a forecast.
3. Understand and identify customer segments. Here a firm must identify the
customer segments the supply chain serves. Customers may be grouped by
similarities in service requirements, demand volumes, order frequency, demand
volatility, seasonality, and so forth. In general, companies may use different
forecasting methods for different segments. A clear understanding of the
customer segments facilitates an accurate and simplified approach to
forecasting.
4. Identify the major factors that influence the demand forecast. A proper analysis
of these factors is central to developing an appropriate forecasting technique.
The main factors influencing forecasts are demand, supply, and product-related
phenomena. On the demand side, a company must ascertain whether demand is
growing, declining, or has a seasonal pattern. These estimates must be based on
demandnot sales data. On the supply side, a company must consider the
available supply sources to decide on the accuracy of the forecast desired. If
alternate supply sources with short lead times are available, a highly accurate
forecast may not be especially important. However, if only a single supplier with a
long lead time is available, an accurate forecast will have great value. On the
product side, a firm must know the number of variants of a product being sold
and whether these variants substitute for or complement each other. If demand
for a product influences or is influenced by demand for another product, the two
forecasts are best made jointly.
5. Determine the appropriate forecasting technique. In selecting an appropriate
forecasting technique, a company should first understand the dimensions that will
be relevant to the forecast. These dimensions include geographical area, product
groups, and customer groups. The company should understand the differences in
demand along each dimension. A firm would be wise to have different forecasts
and techniques for each dimension. At this stage, a firm selects an appropriate
forecasting method from the four methods discussed earlierqualitative, time
series, causal, or simulation. Using a combination of these methods is often
effective.
6. Establish performance and error measures for the forecast. Companies should
establish clear performance measures to evaluate the accuracy and timeliness of
the forecast. These measures should correlate with the objectives of the
business decisions based on these forecasts.
Each organization must use all six steps to forecast effectively.
Difficulty: Moderate
5. Discuss key issues of forecasting in practice.
Answer: Collaborate in building forecasts. Collaboration with supply chain
partners can often create a much more accurate forecast. However, most
forecasts are still made not just within one company, but within one function in a
company. It takes an investment of time and effort to build the relationships with
your partners to begin sharing information and creating collaborative forecasts.

The supply chain benefits of collaboration, however, are often an order of

magnitude greater than the cost.
The value of data depends on where you are in the supply chain. Although
collaboration is a hot topic, this does not mean that reams and reams of data
need to be shared across the supply chain. The value of data depends on where
one sits in the supply chain. To avoid being overwhelmed with data when
collaborating and not being able to sort out whats valuable, think about what
data is valuable to each member of the supply chain and share only that data.
Be sure to distinguish between demand and sales. Often, companies make the
mistake of looking at historical sales and assuming that this is what the historical
demand was. To get true demand, adjustments need to be made for unmet
demand due to stockouts, competitor actions, pricing, promotions, and so forth.
In many cases, these adjustments are qualitative in nature but are crucial to
accurately reflect reality. Although it is not always easy, making an adjustment in
a forecast to move toward demand from just sales will increase accuracy and
therefore supply chain performance.
Difficulty: Moderate
6. Given the following data for demand at the XYZ Company, calculate the monthly
forecast for 2003 using a 3-month moving average. Calculate the MAD and the
tracking signal. Is this a good forecast?
Period
Oct 02
Nov 02
Dec 02
Jan 03
Feb 03
Mar 03
Apr 03
May 03
Jun 03
Jul 03
Aug 03
Sep 03
Oct 03
Nov 03
Dec 03

Demand
850
950
900
1000
950
1050
850
1100
900
1150
1100
900
1000
800
1000

Forecast

Error

MAD

Bias

TS

Answer:
Period
Oct 02
Nov 02
Dec 02
Jan 03
Feb 03
Mar 03
Apr 03
May 03
Jun 03

Demand
850
950
900
1000
950
1050
850
1100
900

Forecast

Error

MAD

Bias

TS

900
950
950
1000
950
1000

-100
0
-100
150
-150
100

100
50
66.7
87.5
100
100

-100
-100
-200
-50
-200
-100

-1
-2
-3
-.57
-2
-1

Jul 03
1150
950
-200
114.3
-300
-2.62
Aug 03
1100
1050
-50
106.3
-350
-3.29
Sep 03
900
1050
150
111.1
-200
-1.8
Oct 03
1000
1050
50
105
-150
-1.43
Nov 03
800
1000
200
113.6
50
.44
Dec 03
1000
900
-100
112.5
-50
-.44
The standard deviation of the random element of demand is approximately
140.63. The tracking signal indicates that this forecast method tends to underforecast demand, but not to the extreme.
Difficulty: Moderate
7.

Using data from the previous problem, calculate the monthly forecast for 2003
using simple exponential smoothing with an = .2. Calculate the MAD and the
tracking signal. How does this forecast compare with the previous one?
Period
Oct 02
Nov 02
Dec 02
Jan 03
Feb 03
Mar 03
Apr 03
May 03
Jun 03
Jul 03
Aug 03
Sep 03
Oct 03
Nov 03
Dec 03

Demand
850
950
900
1000
950
1050
850
1100
900
1150
1100
900
1000
800
1000

Level

Answer:
Period
Oct 02
Nov 02
Dec 02
Jan 03
Feb 03
Mar 03
Apr 03
May 03
Jun 03
Jul 03
Aug 03
Sep 03
Oct 03
Nov 03
Dec 03

Demand
850
950
900
1000
950
1050
850
1100
900
1150
1100
900
1000
800
1000

Level

Forecast

Error

Forecast

Error

MAD

Bias

TS

983

983
986.4
979.1
993.3
964.6
991.7
973.4
1008.7
1027.0
1001.6
1001.3
961.0
968.8

983.0
986.4
979.1
993.3
964.6
991.7
973.4
1008.7
1027.0
1001.6
1001.3
961.0

-17.0
36.4
-70.9
143.3
-135.4
91.7
-176.6
-91.3
127.0
1.6
201.3
-39.0

MAD

17.0
26.7
41.4
66.9
80.6
82.4
95.9
95.3
98.8
89.1
99.3
94.3

Bias

TS

-17.0
19.4
-51.5
91.8
-43.5
48.2
-128.5
-219.8
-92.8
-91.3
110.0
71.0

-1.0
0.7
-1.2
1.4
-0.5
0.6
-1.3
-2.3
-0.9
-1.0
1.1
0.8

The simple exponential smoothing has a smaller MAD and therefore a smaller
standard deviation than the moving average. The tracking signal indicates that
simple exponential smoothing over-forecasts a little, where the moving average
under-forecasts a little.
Difficulty: Hard