What does the term "tracking signal" signify in forecasting?

The term "tracking signal" refers specifically to a measure used to assess forecast performance. It is an essential concept in forecasting that helps evaluate how well a particular forecasting model is performing over time. The tracking signal indicates whether the forecasts are consistently overestimating or underestimating actual values.

By calculating the tracking signal, which typically involves comparing the cumulative forecast error to the mean absolute deviation, organizations can gain insights into the accuracy of their forecasts. A tracking signal that stays within predefined control limits suggests that the forecasting process is stable and that any forecast errors are being dealt with effectively. Conversely, if the tracking signal trends outside these limits, it can signal a need to refine the forecasting model or adjust its parameters.

This monitoring tool allows businesses to maintain a balance between inventory levels and service levels, ensuring they meet customer demand without excessive stock. In this way, the tracking signal plays a crucial role in effective supply chain and inventory management strategies.