POM

Module 3: Demand Forecasting

Unit 4: Evaluating Forecast Accuracy

Overview:

In this Unit, you will learn how to evaluate the accuracy of each of the forecasting models
considered in Module 3: Unit 3, using the Mean Absolute Deviation (MAD) model.
Although there are other mathematical models that can be used to evaluate forecast
accuracy, we will use only MAD in this course for two reasons: first, the MAD
computations are straightforward; i.e., simple and easy to do; and second, the MAD
results are easy to interpret and understand.

Module Objective:
After successful completion of this Unit, you should be able to:

• Evaluate the accuracy of time series forecasting models using the Mean
Absolute Deviation (MAD) model.

Course Materials:
• Handout: Evaluating the Accuracy of Forecasting Models Using MAD

Calculate:

EVALUATING THE ACCURACY OF FORECASTING MODELS USING MAD

After calculating the demand forecasts using the time series forecasting models – NA,
SMA, WMA and ES – let us now determine which of these models provides the most
accurate forecasts for the given time series data. In our evaluation, we will be using the
Mean Absolute Deviation (MAD) model.
The mathematical equation for the Mean Absolute Deviation model is:

where: n = the averaging period

Ai = the actual demand for period i
Fi = the demand forecast for period i

To make sure that the calculated MAD of each forecasting model is comparable to those
of the others, the forecaster needs to use the same n for all MAD calculations. This n is
determined by that forecasting model that has the least number of A and F data pairs.
By observing the tabulated data, we notice that the NA model has 11 pairs of complete
A and F data (Weeks 2 through 12).
The SMA model has 9 pairs of complete A and F data (Weeks 4 through 12).

Review:

Activities/Assessments:
Activity __.
The WMA model has 8 pairs of complete A and F data (Weeks 5 through 12).

Review:

Activities/Assessments:
Activity __.
And the ES model has 12 pairs of complete A and F data (Weeks 1 through 12).

Review:

Activities/Assessments:
Activity __.

Therefore, since the least number of pairs of complete A and F data is 8 (that of the
WMA model), n = 8 should be used for MAD calculations, covering the data for Weeks 5
through 12. We may now calculate the MAD of each forecasting model.

Step 1: For each forecasting model, calculate the absolute value of the deviation of the
demand forecast from the actual demand for each period, |Ai – Fi|. For example, for the
NA model, the |Ai – Fi| for Weeks 5, 6 and 7 are: |18 – 23|= 5, |16 – 18|= 2, and |20
– 16| = 4, respectively. Continuing on until Week 12 yields the following results:
 5
2
4
2
4
2
5
7

MAD 3.875

Step 2: Calculate the MAD of each model by taking the simple average of the |Ai – Fi|
values from Week 5 through 12; thus, for the NA model,

5 + 2 + 4 + 2 + 4 + 2 + 5 + 7 31
𝑀𝑀𝑀𝑀𝑀𝑀𝑁𝑁𝑁𝑁 = = = 3,875 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
8 8

Interpretation: On the average, the demand forecast generated by the NA model deviates
from the actual demand by 3,875 liters.
Following the same procedure, the corresponding |Ai – Fi| and MAD results of the SMA,
WMA and ES models, would be:

Therefore, we would recommend the ES model with α = 0.3 as the forecasting model to
be used by Petron’s manager because it has the lowest MAD, which means that it is the
model that gives the most accurate forecasts for Petron’s time series data.

Using the ES model with α = 0.3, the demand forecast that we would recommend for
Week 13 would be 19,400 liters.
Activities/Assessments:
Activity 8

The following table represents sales data for milk (in hundred liters) sold by a grocery.
Do the computations to fill out the table and answer the following questions:

1. Using MAD as the criterion, which of the following models would you use for the
given time series data? Why?
A. Naïve approach;
B. 5-month SMA model;
C. WMA model with weights 0.1, 0.3, and 0.6; or
D. ES model with α = 0.5 and a forecast of 3,500 liters in the first month.

NOTE: In answering Item 1, mention the whole description of the model; i.e., not just
“SMA model”, but “SMA model with n = …”; not just “WMA model”, but “WMA model
with weights …”; not just “ES model”, but “ES model with α = …”.

2. Interpret the MAD of the most accurate among the forecasting models above.

3. Based on your decision in Item 1, what should be the forecast for Month 11?

Actual 100 liters

Demand NA SMA WMA ES
Month 100 liters F |A – F| F |A – F| F |A – F| F |A – F|
1 39
2 47
3 39
4 44
5 49
6 48
7 45
8 56
9 53
10 61
11
MAD