CPIM Practice Exam

In a forecast, what does a high MAD value indicate?

1. The forecast is highly accurate

2. There are large discrepancies between actual and forecasted values

3. The forecasting model is reliable

4. There is little variation in past data

The correct answer is: There are large discrepancies between actual and forecasted values

A high MAD (Mean Absolute Deviation) value indicates that there are large discrepancies between actual and forecasted values. MAD is a measure of forecast accuracy that calculates the average absolute differences between predicted and actual observations. When the MAD value is high, it signifies that the errors in the forecasts are substantial, meaning the forecasted values deviate significantly from what has actually occurred. This suggests that the forecasting method might not be capturing the underlying patterns in the data effectively, and thus, it is likely not providing reliable predictions. Understanding this concept is crucial as it directly impacts business decisions based on forecasting. Effective decision-making relies on accurate forecasts, and a high MAD serves as a warning sign that adjustments may be needed in the forecasting approach, methodology, or even in the underlying data being used.