Calculating the average with the tracking signal
A trend in K3S is shown using the tracking signal. The tracking signal is used to place more emphasis on recent history when a product is trending up or down. For products trending up, there will be a plus sign.
So what does this do and why is it important to understand?
A simple way to understand how this average is calculated is as follows:
Say you have a product with an average of 100. In the new period, you have customer demand equaling 120 units. We first take 90% of the average giving us 90. Next, we take 10% of the new period demand giving us 12. Add them together to get our new average of 102.
Average 100 X 90% = 90
PTD 120 X 10% = 12
New average 102 = (90 +12)
The 10% used above for the new period is where the tracking signal is placed in the math.
For example, when the tracking signal is +.300 or 30%, the math changes. We place even more weight on the new period. So now it would look like this:
Average 100 X 70% = 70
PTD 120 X 30% = 40
New average 110 = (70 +40)
When looking at trending products, there are three things for you to consider as you proceed:
- Do you think the trend will continue? If so, don’t make any changes. Reevaluate the product next month when you have another period of demand and more sales data.
- Do you think the product will level off? If so, you will need to clear the tracking signal. The tracking signal is causing the product average to move up and down much faster with each period of history. If the product is no longer trending up, you want to clear the tracking signal.
- Are you not sure what it will do? Let it ride! It will likely be a PE3 Check next month. At that time, you can reconsider your options once you have more data.
To make a decision, you may need to do some investigating. Start with your Sales Journal.
After looking at the product’s sales, you may decide on this example that you think the product will begin to level off. Now you will need to clear out that tracking signal. This will adjust the math back to normal with 10% of the weight on each new period instead of 82.5% (or perhaps even higher going forward).
To do so, click “Calculate Average From” and adjust the average from a recent period of history.
Now click “Update Average From.”