CPIM Practice Exam

How is forecast error defined?

1. The overall accuracy of a forecasting model

2. The difference between actual demand and forecast demand

3. The sum of forecast values over several periods

4. The method used to correct forecasts

The correct answer is: The difference between actual demand and forecast demand

Forecast error is defined as the difference between actual demand and forecast demand. This measure quantifies how accurate a forecast is by highlighting the discrepancy between what was predicted and what actually occurred. Understanding forecast error is critical in supply chain management as it allows businesses to assess the reliability of their forecasting methods, identify trends in performance, and implement strategies for improvement. By analyzing forecast errors, organizations can better align their inventory and production plans, leading to enhanced operational efficiency and customer satisfaction. The first option refers to the accuracy of the forecasting model but does not specifically capture the concept of 'error.' The third option mentions the sum of forecast values, which doesn't relate to error but rather to cumulative forecasting outputs, and the last option denotes methods of correction rather than defining error itself. Thus, the definition provided as the difference between actual demand and forecast demand is the most precise and relevant in this context.