In such a case, there is a substantial risk of inventory becoming obsolete, while production costs are also increased. The four costs involved include basic production, changes in production rate, inventory holding, and backlog costs. Specifically, the first includes material costs, labor costs, and compensation. The second involves hiring, training, and costs involved in laying off workers. Inventory holding costs involves storage, insurance, taxes and obsolescence, while backlogs costs are those incurred by expediting, loss of customer goodwill, and cancelled orders because of product unavailability. Backlog costs are difficult to quantify, because they involve a larger factor than only financial costs. The loss of customer goodwill for example has an effect on both current and future revenue.

3) a tracking signal is a useful device in forecasting market trends. It indicates the deviations above or below the actual market occurrence as compared to the forecast for these markets. This is useful in adjusting the current forecast model to be more accurate for future forecasts. If the tracking signal for example indicates a deviation of -2, the forecast model is too high above the mean of actual occurrence, and needs to be adjusted accordingly. Concomitantly, a positive deviation indicates a deviation below the mean of occurrence, which reflects that the forecasting...

This means that no forecasting model can be perfectly aligned to the actual occurrence at all times, but the deviation should be close to zero in order for the model to be effective. Furthermore, it is also important to take into account the price of the demand items. A high-priced items for example should be monitored more frequently than those items that are priced at a lower level.
It is not always desirable to used the forecast errors in absolute terms, but rather to use the average of errors over a period of time in order to make more targeted and effective adjustments to the existing model.

A tracking signal is therefore a very useful device in determining the future of market demands. It provides a valuable tool by means of which market trends can be forecast with greater accuracy by means of adjusting the forecasting model. As such, production can be adjusted according to historical forecasting errors and future indications of demands. This minimizes the cost to revenue ratio and eventually means a higher income level for the producer.

As such, the tracking signal is useful in any industry, and can be used in order to target and increase the accuracy of existing forecasting models.