# Lecture 5 - Forecasts Flashcards

1
Q

Why do we forecast?

A

To take action

2
Q

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

A
• 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.
3
Q

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

A
1. Granularity
2. Temporality
3. Process
4. Metrics
4
Q

What is meant by “Granularity”?

A

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

5
Q

There are 3 types of hierarchical forecasts, which ones?

A
1. Top-down
2. Middle-out
3. Bottom-up
6
Q

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

A

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.

7
Q

What is the formula for “Error”?

A

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

8
Q

What is the formula for “Bias”?

A

Bias = [1/N] * Sum of e

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

9
Q

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

A

Mean Absolute Error.

MAE = [1/N] * Sum of | e |
MAE in % = (Sum of | e |) / (sum of d)

10
Q

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

A

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.

11
Q

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

A

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) ]

12
Q

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

A

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

13
Q

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

A

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

14
Q

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

A

We compare it to benchmarks.

15
Q

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

A

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.

16
Q

What should we do to forecast demand by excellence?

A

We should achieve efficacy, efficiency, and focus. The forecasting KPI should be done on the weighted MAE + weighted Bias.

17
Q

When should we use “Judgemental Forecasting”?

A

When there is present information about actions in the future that the models can’t forecast.

Examples:

• I know my main client expects lower sales than usual. I will reduce the forecast.
• I will input demand for this new product.
• We will increase pricing next month. I should reduce the forecast.
18
Q

What are 2 sources of “judgemental Intentional bias”?

A
1. Misalignment of Incentives

2. Power and Influence

19
Q

What is the “Cobra Effect”?

A

Cobra effect – incentivizing people with cash could also go wrong.

20
Q

What are the sources of “judgemental Unintentional bias” and what is meant by them?

A
• Cognitive Bias - (unconsciously) we are all looking for information supporting our current beliefs and ideas. While avoiding contradictory information.
• Anchoring Bias - we think by comparison. The first number we think of will influence our thought process (even if it is irrelevant).
• Apophenia - we are hard-wired to see patterns (when there is no specific link)
21
Q

What is meant by “Time series forecasting”?

A

The forecast is an extension of the historical demand.

22
Q

Give a brief explanation of each of the theoretical components of demand - there are 5 of them

A

The five theoretical components of demand are the trend, the cyclical, the seasonal, the average and the random components.

1) The average component of demand is the level around which demand varies over a period of time.
2) The trend is the persistent (long term) pattern of demand. It may depend on many factors, including the Product Life Cycle phase that the product is in.
3) The cyclical component of demand is a multiple year pattern that arises from economic, political or other factors.
4) The seasonal component of demand is the shorter-term (one year or less) pattern of demand.
5) The random component of demand is the residual part of demand. It is the erratic difference between the four previous components and actual demand (the noise).

23
Q

What is the formula for Exponential Smoothing with a Trend?

A

1) F_t = a*A_(t-1) + (1-a) [ (F_(t-1)+T_(t-1) ]
2) T_t = B
(F_t - F_(t-1)) + (1-B) * T_(t-1)
3) FIT_t = F_t + T_t

We start with 1) and 2) the in 3) is where all work flows out into the forecast that we will use. Then repeat.

24
Q

What are the respective properties of CFE, MAE, MSE and MAPE?

A

The CFE does not reward precision. It only rewards the absence of bias.
The MAE rewards median forecasts.
The MSE rewards average forecasts.
The MAPE has a tendency to undershoot demand by overweighing periods with low demand.