Two different forecasting techniques (F1 and F2) were used to forecast demand for cases of bottled water. Actual demand and the two sets of forecasts are as follows: Predicted Demand Period Demand F1 F2 1 68 66 66 2 75 68 68 3 70 72 70 4 74 71 72 5 69 72 74 6 72 70 76 7 80 71 78 8 78 74 80 a. Compute MAD for each set of forecasts. Given your results, which forecast appears to be more accurate? Explain. b. Compute the MSE for each set of forecasts. Given your results, which forecast appears to be more accurate? c. In practice, either MAD or MSE would be employed to compute forecast errors. What factors might lead a manager to choose one rather than the other? d. Compute MAPE for each data set. Which forecast appears to be more accurate?

Solution :
A : As per MAD, Forecast 2 is better because it has less error, and more accuracy
B : As per MSE, Forecast 2 is better because it has less error, and more accuracy
C : MSE, because it squares the error term, mathematically “punishes” the forecast with larger errors (hence more incorrect). MSE is a more sensitive measure of accuracy when considering the size of the deviation from actual demand. Both MAD and MSE are good, valid measures of forecast accuracy
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D : As per MAPE, Forecast 2 is better because it has less error, and more accuracy
 
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