Forecast alarms are used as warning signals in the continual checking to make sure the demand values used as a basis for forecasting are reasonable and the forecasts calculations are within acceptable margins of error.
The forecast alarms are activated during forecast checks done in connection with automatical forecast calculation. The following three alarms can be signaled.
Forecast alarm 1
This is activated when the difference between base demand for a period and the applicable base forecast is greater than a specified margin. This margin is calculated by multiplying forecast alarm factor 1 by the Forecast MAD.
Forecast alarm 2
This is activated when the mean forecast error for a period is greater than a specified margin. This margin is calculated by multiplying forecast alarm factor 2 by the forecast MAD.
Forecast alarm 3
This is activated when the number of periods during a rolling year with demand greater than zero is less than a specified factor.
Three forecasts checks are made in the system. An alarm is activated when the result of one or more of these checks falls outside the specified margin of error.
This means that actual demand is periodically checked to make sure the values in the system are reasonable. The alarm can be activated when, for example, input is entered incorrectly. However, this can also occur when a single unusually large customer order is made.
The check is made by comparing each period’s applicable base forecast and base demand for the same period. When the absolute difference between these is greater than the specified margin, then forecast alarm 1 is activated.
The margin of error is calculated by multiplying forecast alarm factor 1 by the forecast MAD. This factor is set so that within a reasonable degree of certainty, reasonable demand values do not activate the alarm. Another consideration for setting the forecast alarm factor is the amount of manual processing that may be necessary to review fresh demand information. As a general guideline forecast alarm factor 1 can be to set at or near 3.
Forecast error check
This means that mean forecast error is calculated and checked on a continual basis. This is done by comparing mean forecast error to a specified margin. When this exceeds the margin, then forecast alarm 2 is activated.
The margin is calculated by multiplying forecast alarm factor 2 by the forecast MAD. This factor is set so that within a reasonable degree of certainty only those cases where forecast quality is becoming unacceptably low activate the alarm. Another consideration for setting the forecast alarm factor is the amount of manual corrections that may be necessary as opposed to relying on the automatic calculations. As a general guideline, forecast alarm factor 2 can be to set at or near 0.6.
Periods with demand greater than zero
For this check the number of running periods in a year where demand is greater than zero are calculated on a continuing basis. The number of such periods is then compared to the set alarm factor (3). When this number (of periods where demand is greater than zero) is less than the alarm factor, then forecast alarm 3 is activated.
The purpose of this check is to identify items for which demand is reduced to the point where current forecast methods and parameters may need to be adjusted. Selecting the alarm factor depends on the situation, but generally should be larger than 6. The item should have some demand in at least half of the forecast periods measured.