Question

An operations manager, after monitoring the production forecast for the last 12 months, calculated the following errors: MAD=34.7; MSE=127.6; MAPE=12.5%. She then collected actual vs forecast data for an additional 8 months:

Period	1	2	3	4	5	6	7	8
Actual - Forecast	30	27	-25	13	-31	5	-12	18

A) Calculate 3 sigma upper and lower control limits for the data

B)using these limits is most recent forecast "in-control"?

C)should she consider changing the forecasting methodology?

Answer 1

Solution:-

(A) Calculate 3 sigma upper and lower control limits for the data

MSE=127.6,  MAD=34.7, MAPE=12.5%

3 sigma upper control limit = 0+3 sqrt(MSE)

3 sigma upper control limit = 3 sqrt (127.6) = 3*11.296017

3 sigma upper control limit = 33.88805099

MSE=127.6,  MAD=34.7, MAPE=12.5%

3 sigma lower control limit = 0-3 sqrt(MSE)

3 sigma lower control limit = 3 sqrt (127.6) = -3*11.296017

3 sigma lower control limit = -33.88805099

MSE=127.6,  MAD=34.7, MAPE=12.5%

B)Using these limits is most recent forecast "in-control"?

The production forecast for the last 12 months and MSE=127.6,  MAD=34.7, MAPE=12.5%

We can see forecast errors for additional 8 months are within control limits

C)Should she consider changing the forecasting methodology?

The production forecast for the last 12 months and MSE=127.6,  MAD=34.7, MAPE=12.5%

No she should not consider changing the forecasting methodology