# Lecture 5 - Forecasts Flashcards

Why do we forecast?

To take action

In terms of “Sales & Operations Planning”, What does it mean and what is the objective?

- WHAT: Process that integrates demand, supply, and financial planning into one business plan.
- OBJECTIVE: Align teams by matching demand and supply in the most desirable product portfolio and mix to maximize sales and profit.

What are the 4 dimensions to set up a “Demand Forecasting Process”?

- Granularity
- Temporality
- Process
- Metrics

What is meant by “Granularity”?

How we should forecast is dependent on Material, Localization, Time buckets and Horizon.

There are 3 types of hierarchical forecasts, which ones?

- Top-down
- Middle-out
- Bottom-up

What is meant by “Bias” and “Accuracy” and what is the trade-off between them?

Bias: tendency to over- or under forecast.

Accuracy: amplitude of the forecast error

Rather have Biased and Accuracte results than unbiased and non-accurate results. The first one enables you to take action.

What is the formula for “Error”?

error = Forecast - Demand –> e = f - d

What is the formula for “Bias”?

Bias = [1/N] * Sum of e

In %: We take, (sum of e) / (sum of d)

What is meant by “MAE” and what’s the formula?

Mean Absolute Error.

MAE = [1/N] * Sum of | e |

MAE in % = (Sum of | e |) / (sum of d)

What is meant by “MAPE” and what’s the formula?

Mean Absolute Percentage Error.

MAPE = [1/N] * (Sum of | e |) / (sum of d)

Notice that the difference is that we take the average of MAE.

What is meant by “RMSE” and what’s the formula?

Root Mean Squared Error. Penalizes bigger errors.

RMSE = [ [1/N] * (Sum of e^2) ]^(1/2) ]

RMSE in % = [ [1/N] * (Sum of e^2) ]^(1/2) / [ [1/N]*(sum of d) ]

Which of the 4 metrics is the best one to use?

All of them are good, it depends on our situation.

MAE vs RMSE, which method is best to use to prevent the effect of outliers?

MAE is biased but accurate and then RMSE is more sensitive to outliers. So, MAE.

How do we know if our model is doing a great job?

We compare it to benchmarks.

What is meant by “Efficacy” and “Efficiency”?

for instance:

Efficacy: You do not want any team member to spend time editing the forecast while not improving it.

Efficiency: You do not want any team member to spend too much time editing the forecast.