Calculating Demand Forecast Accuracy
Encyclopedia
Calculating demand forecast accuracy is the process of determining the accuracy of forecasts made regarding customer demand for a product.
or MAPE. Statistically MAPE
is defined as the average of percentage errors. Most practitioners, however, define and use the MAPE as the Mean Absolute Deviation divided by Average Sales. This is in effect a volume weighted MAPE. This is also referred to as the MAD/Mean ratio.
A simpler and more elegant method to calculate MAPE across all the products forecasted is to divide the sum of the absolute deviations by the total sales of all products.
, Root Mean Squared Error, Tracking Signal
and Forecast Bias
..
was developed to reduce forecast error and increase forecast accuracy.
Importance of forecasts
Understanding and predicting customer demand is vital to manufacturers and distributors to avoid stock-outs and maintain adequate inventory levels. While forecasts are never perfect, they are necessary to prepare for actual demand. In order to maintain an optimized inventory and effective supply chain, accurate demand forecasts are imperative.Calculating the accuracy of supply chain forecasts
Forecast accuracy in the supply chain is typically measured using the Mean Absolute Percent ErrorMean Absolute Percentage Error
Mean absolute percentage error is measure of accuracy in a fitted time series value in statistics, specifically trending. It usually expresses accuracy as a percentage, and is defined by the formula:...
or MAPE. Statistically MAPE
Mean Absolute Percentage Error
Mean absolute percentage error is measure of accuracy in a fitted time series value in statistics, specifically trending. It usually expresses accuracy as a percentage, and is defined by the formula:...
is defined as the average of percentage errors. Most practitioners, however, define and use the MAPE as the Mean Absolute Deviation divided by Average Sales. This is in effect a volume weighted MAPE. This is also referred to as the MAD/Mean ratio.
A simpler and more elegant method to calculate MAPE across all the products forecasted is to divide the sum of the absolute deviations by the total sales of all products.
Calculating forecast error
The forecast error needs to be calculated using actual sales as a base. There are several forms of forecast error calculation methods used, namely Mean Percent ErrorMean Percentage Error
In statistics, the mean percentage error is the computed average of percentage errors by which estimated forecasts differ from actual values of the quantity being forecast.Formula for mean percentage error calculation is:...
, Root Mean Squared Error, Tracking Signal
Tracking signal
In statistics and management science, a tracking signal signal monitors any forecasts that have been made in comparison with actuals, and warns when there are unexpected departures of the outcomes from the forecasts...
and Forecast Bias
Forecast bias
A forecast bias occurs when there are consistent differences between actual outcomes and previously generated forecasts of those quantities; that is, forecasts may have a general tendency to be too high or too low...
..
Reducing forecast error
Reference class forecastingReference class forecasting
Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...
was developed to reduce forecast error and increase forecast accuracy.
See also
- Consensus forecastsConsensus forecastsIn a number of sciences, ranging from econometrics to meteorology, consensus forecasts are predictions of the future that are created by combining together several separate forecasts which have often been created using different methodologies...
- Demand forecastingDemand forecastingDemand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data...
- Optimism biasOptimism biasOptimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...
- Reference class forecastingReference class forecastingReference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...