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How to calculate forecast error / accuracy

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  • #33576

    Gareth Weir
    Participant

    Just reviewing our forecasting KPIs and wanted some advice as to the differneces between taking the (forecast-actual) / forecast and (forecast – actual) / actual. 
    Are there any reasons one would prefer one over the other.
    Many thanks
    Gareth

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    #94962

    Alfred Curley
    Participant

    Did you get an answer to your inquiry?
    Most of the people I speak to recommend expressing the difference as a % of Actual – not Forecast.  I call this forecast error (as opposed to forecast variation)

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    #99431

    Mark Chockalingam
    Participant

    Gareth:
    I may have answered this already in an email to you in response to a question you posted on my website http://www.demandplanning.net.
    Here is the link that had the answer to your question as well:
    http://www.demandplanning.net/questionsAnswers/actualandAccuracy.htm
    Why do you measure accuracy/error as forecast-actual / actual and not over forecast?
    Historically Sales groups have been comfortable using forecast as a denominator, given their culture of beating their sales plan. Since most of the demand planning evolved from Sales function, MAPE was also measured this way. So this was mostly cultural. In such a scenario, Sales/Forecast will measure Sales attainment. For example, sales of 120 over 100 will mean a 120% attainment while the error of 20% will also be expressed as a proportion of their forecast. So it was more of a convenience for Sales Management.    
    However, more scientifically, the denominator is designed so that it will  control functional bias in the forecasting process. Since Supply Chain is  the customer of the forecast and directly affected by error performance, an  upward bias by Sales groups in the forecast will cause high inventories. So if Demandplanning reports into the Sales function with an  implicit upward bias in the forecast, then it is appropriate to divide by the Actual Sales to overcome this bias.  Using Actuals is also ideal because it is not under the control of the forecaster. If we use forecast as the denominator, the forecaster can improve accuracy marginally by consistently over-forecasting.
    But there is a trend in the industry now to move Demandplanning functions into the Supply Chain. If Supply Chain is held responsible for inventories alone, then it will create a new bias to underforecast the true sales. If MAPE is using Actuals, then you can improve forecast accuracy by under-forecasting while the inventories can be managed below target.
    Mark Chockalingam
    http://www.vcpassociates.com
    [email protected]

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    #99453

    SSNewby
    Member

    Mark,
     
    I have read your several postings, each of which direct the reader to your consulting web site, and I need to tell you that is not allowed in the isixsigma.com forum.    Contribute, but don’t advertise.  
     SSNewby

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    #99504

    Mark Chockalingam
    Participant

    SS,
    Thanks for the advice.  It was not my intent to advertise anything.  The reference to the website that contains the material is legitimate.  And the material is NOT bogus.  This is relevant on material on forecast accuracy calculations and the explanation is to the point of the question. 
    I agree that I need not have inserted reference to my VCP Associates page at the end of the message.  I will try and see if I can edit the message now.
    best regards,
    Mark

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