Demand Forecasting Measures of Accuracy

What do inventory experts suggest as a good tracking signal?

+- 4 for high volume items. +- 8 for lower volume limits. As tighter limits are instituted there is a greater probabilty finding exceptions that require no action but it also means catching changes in demand earlier.

What are the four common absolute measures?

1. Running Sum of Forecast Error (RSFE) 2. Mean Forecast Error (MFE) 3. Mean Absolute Deviation (MAD) 4. Mean Squared Error (MSE)

What is used to often monitor a tracking signal?

A control chart. If the tracking signal falls outside preset control limits, there is a bias problem with the forecasting method and reevaluation of the forecast method is warranted.

What is the cost associated with prediction error?

Cost can be substantial. Can include the cost of lost sales, safety stock, unsatisfied customers and loss of goodwill.

What are forecast errors used to evaluate?

Evaluate a forecasting model. For all forecasting accuracy measures the closer the measure is to zero, the better the forecast.

Equation for forecast error?

Forecast Error= Actual- Forecast

MAD is a widely used....

Forecast accuracy indicator. It gives the evaluator a very simple way to compare various forecasting methods.

What does a large tracking signal indicate?

Indicates a biased forecast and an inappropriate model, change the smoothing constants and try a different model.

What is the percentage of companies who have a forecast accuracy exceeding 90%?

Less than 20%

What are the relative measures?

Mean Absolute Percent Error.

What is the Mean Squared Error?

Measure of the dispersion or variance of the forecasting errors. This measure is sensitive to extreme outliers (data points that don't fit the underlying pattern). This measure gives greater weight to larger errors.

What is mean absolute deviation (MAD)?

Measures the average magnitude or size of the forecasting errors. Or the dispersion (or variance) of the forecasting errors.

What is the mean forecast error?

Measures the forecasts central tendency or Bias. Forecast bias measures the tendency of a forecast to be consistently higher or lower than actual demand.(+ sign means under forecasting)

In general forecasters do not favor models that?

Provide them with many small errors and a few very large ones.

What is the Root Mean Squared Error?

Similar to the basic statistical concept of a standard deviation. Take square root of squared error.

What is Mean Absolute Percent Error?

Standardizes the forecast errors with respect to the actual data. Measures the average relative magnitude of the forecast errors- express as a percentage of the actual demand.

What does Running Sum of Forecast Error tell you?

Sum of error over time

A positive RSFE (and MFE) indicates?

That the forecasts generally were too low- they were underestimating the demand and stock outs likely occurred.

A negative RSFE and MFE indicates?

That the forecasts were too high- they were overestimating demand resulting in excess inventory

What does a MAD value of Zero indicate?

The forecast exactly predicated demand over the evaluation period.

A Zero RSFE and MFE indicates?

The measure is unbiased (negative errors equaled the positive errors) Does not indicate accuracy of forecasting

What are Relative measures of forecasting error?

These measures have the advantage of providing the correct perspective of the true magnitude of the forecast error. For example if absolute forecast error is 10, the error looks a lot better when the actual demand is 1000 than when the actual demand is 100

What is the ultimate goal of any forecasting endevavor?

To have an accurate and unbiased forecast

What is a tracking signal?

Tracks forecasting bias relative to magnitude of the forecast error. Simply an indicator of when a forecast exceeds a tolerable error limit.

A MAD value greater than zero indicates...

the forecast either over or underestimated demand.