What is Tracking Signal?

Tracking signal is a measure used to evalue if the actual demand does not reflect the assumptions in the forecast about the level and perhaps trend in the demand profile. In Statistical Process Control, people study when a process is going out of control and needs intervention.

Similarly Tracking signal tries to flag if there is a persistent tendency for actuals to be higher or lower systematically. If Forecast is consistently lower than the actual demand quantity, then there is persistent underforecasting and Tracking Signal will be positive.

Tracking Signal Calculations Example

Tracking Signal is calculated as the ratio of Cumulative Error divided by the mean absolute deviation. The cumulative error can be positive or negative, so the TS can be positive or negative as well.

TS should pass a threshold test to be significant. If Tracking Signal > 3.75 then there is persistent underforecasting. On the other hand, if this is less than -3.75 then, there is persistent over-forecasting.

So in essence, |TS| > 3.75 implies a forecast bias ==> TS < -3.75 or TS > 3.75 implies a bias.

So what is magical about 3.75. This is an approximation using the relationship between a normally distributed forecast error and the Mean Absolute deviation.

In General, Forecast Error (using RMSE) * 0.8 = MAD.

At 99% promised service level, you will be using a 3 Sigma level. As a measure of MAD, this translates into 3.75 MAD hence the 3.75 as the threshold for TS.

The Tracking Signal is computed using the following formula –