What is a tracking signal? How can managers use the information provided by the tracking signal to improve the quality of forecasts?
What will be an ideal response?
Tracking signal is used to determine if a forecasting model is stable over time. If the tracking signal falls outside the pre-set control limits, there is a bias problem with the forecasting method and an evaluation of the way forecasts are generated is warranted. The tacking signal provides an indication of whether the forecasts are consistently over or under actual demand. A biased forecast will lead to excessive inventories or stock-outs. Adjustments to the forecasts can be made accordingly. Some inventory experts suggest using ±4 for high-volume items and ±8 for lower-volume items while others prefer a lower limit. For example, a company may start off with a control limit for their tracking signal of ±4. Over time, the quality of forecasts improved and the control limits were reduced to ±3. As tighter limits are instituted there is a greater probability of finding exceptions that require no action, but it also means catching changes in demand earlier.
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