Certified Production & Operations Manager (POM) Practice Exam

For new products in a growth mode, what effect does a low alpha have on forecast errors?

1. Minimizes forecast errors

2. Increases forecast errors

3. Stabilizes forecast over time

4. Produces no effect

The correct answer is: Increases forecast errors

In the context of forecasting, especially for new products experiencing growth, the alpha value refers to the smoothing constant used in exponential smoothing techniques. A low alpha indicates that the forecast relies more heavily on past data rather than on the most recent observations. When a product is in the growth phase, demand can be highly volatile and sensitive to market conditions, consumer preferences, and other external factors. A low alpha results in forecasting that is less responsive to these fluctuations because it dampens the effect of recent sales data. As a result, the forecast may lag behind actual demand trends, leading to a mismatch between what is predicted and what is actually occurring in the market. This lag can cause the forecasting errors to be larger because it fails to account for the rapid changes in demand typically associated with new product growth. Therefore, with a low alpha, the forecasts are more likely to be inaccurate and exhibit a higher degree of error, aligning with the assertion that it increases forecast errors during the growth phase of new products.