Question

Using historical data of similar products sold in the previous season and looking at their A/F ratio (actual demand/forecasted demand) is one way of establishing the variation in the forecast accuracy. This method allows us to calculate a mean and standard deviation for a product's forecast based on a forecast given by marketing. For example, marketing thinks we will sell 3,200 Hammer 3/2s. Using the historical data, we adjust this forecast to: Expected actual demand for Hammer 3/2 (μ) = 0.9975 × 3,200 = 3,192. Standard deviation of actual demand (σ) = 0.369 × 3,200 = 1,181. Explain why this adjustment and information is useful for operations.

Answer 1

The above adjustment and information provided is very useful for smooth functioning of any business enterprise . As we know that forecast and speculations done can't be always right and can have variation from the results we have expected and then we have to formulate new plan to make the expected targets achieve which we were not able to achieve previously , but this whole process becomes very lengthy and time consuming so to avoid this kind of situation an estimate of the inaccuracy of the forecast is done to become pre prepared for any such kind of situation. A good forecast includes mean and estimate of how the forecast will vary around the mean. thus this adjusment is useful because of certain following reasons-

• This measure and adjustments helps us understand the risk of forecast and allows us to make decisions allowing for variability that is present . Thus we can say that forecasting only helps in getting us unreached positive results but this adjustment allows to estimate the uncertaiity as well.
• This adjusments are basically done to know the reliability of the forecast model.
• In this actual past demand information is compared to the forecast of that period and tells the firm how well their forecast model is working and tells about the risks involved in forecasting.
• It helps the manager understand the inherent variation in the demand and helps him making the future forecast model on the basis of past forecast models.
• it helps the enterprise in knowing the necessary changes required for growth and develpment .

We can say that the upper adjusments should be performed by every business entity to get the clear cut information and necessary changes required and helps the management process to function smoothly.