MEASUREMENT OF ERROR

IN FORECASTING

By-: Alok Kumar Yadav

MBA Ist Year
IILM Academy Of Higher Learning
Greater Noida
 FORECASTING

Forecasting is a tool used for

predicting
future demand based on
past demand information.
The biggest nightmare for any Demand Planner is
forecasting inaccuracy. If the demand is
underestimated, potential sales revenue will be lost
and on the other hand if demand planner
overestimates the demand, company will get stuck
with non moving inventory. The term Forecast Error
is used to measure the Forecast Accuracy. There are
various methods to calculate Forecast Error. Each
method has got its relevance under various
circumstances. The below procedure explains them
in details.
 Basic Concept

Forecast Error :

FE  Ai  Fi

Where :
Ai – the actual value in time period i
Fi – the forecast value in time period i
 Basic Concept

Mean Absolute Deviation (MAD)

First absolute deviation is calculated for each of

the data point. Absolute Deviation is mod
difference between forecast and actual value for
the data point. It is averaged over selected time
zone to get MAD. This means, there is no
differentiation between positive and negative error.
Also there is no reference to base on which the
error is measured.
Mean Absolute Deviation

MAD 
 Actual t  Forecast t

n
MEAN SQUARE ERROR

  Actual  2
t  Forecast t
MSE 
n 1
 Mean Absolute Percentage Error (MAPE) –

First absolute percentage deviation is calculated by

subtracting forecast from actual and then dividing it
by actual value. The MAPE is expressed as average
mod percentage value over selected time zone.
MAPE does not differentiate between positive and
negative error but it does have reference to the
quantum of the value. MAPE is used where likelihood
of positive and negative error is same and random
Mean Absolute Percentage Error

Actualt  Forecastt
 Actualt
100
MAPE 
n
 Forecast Error Calculation
Actual Forecast (A-F)
Period
(A) (F) Error |Error| Error2 [|Error|/Actual]x100
1 107 110 -3 3 9 2.80%

2 125 121 4 4 16 3.20%

3 115 112 3 3 9 2.61%

4 118 120 -2 2 4 1.69%

5 108 109 1 1 1 0.93%

Sum 13 39 11.23%

n=5 n-1 = 4 n=5

MAD MSE MAPE

= 2.6 = 9.75 = 2.25%

 Benefits

Improved Forecast Accuracy leading to better

decision making

 Reduced cost because of reduction in inventory

 Higher sales revenue because of lesser stock outs. 

THANK YOU