FORECAST

ACCURACY
Supply Chain Management
BSIE
What is a
“good”
forecast?
2
 FORECAST
ACCURACY
FORECAST ACCURACY
- the degree to which sales leaders
successfully predict sales (in both the long and
short term). Accurate sales forecasts are
essential for making key decisions about short-
term spending and deals for key accounts.

3
 FORECAST
ACCURACY
FORECAST ERROR
- is the difference between the actual
quantity and the forecast.

Forecast errors can be separated into:

• standard error measures
• relative error measures

4
 FORECAST
ACCURACY
FORECAST ERROR
Forecast error can be expressed as:

et = At − Ft
Where:
et = forecast error for period t;
At = actual demand for period t;
Ft = forecast for period t.
5
Forecast errors can be evaluated
using a variety of methods:
▫ Mean Absolute Deviation
(MAD)
▫ Mean Absolute Percentage
Error (MAPE)
▫ Mean Square Error (MSE)
▫ Running Sum of Forecast
Errors (RSFE)
▫ Tracking Signal
▫ Forecast Bias 6
 MEASURES OF FORECASTING
ACCURACY
Mean Absolute Deviation (MAD)
– measures the total error in a forecast
without regard to sign.

MAD 
 A F i i
Ai = actual value n
Fi = forecast value
n = number of fitted points
Σ = summation notation
7
 MEASURES OF FORECASTING
ACCURACY
Mean Absolute Percentage Error (MAPE)
– also called the mean absolute percentage
deviation (MAPD). It measures accuracy of a forecast
system as a percentage.
| Ai  Fi |
 ( A x100)
Ai = actual value MAPE  i

F = forecast value n
i
n = number of fitted points
Σ = summation notation
8
 MEASURES OF FORECASTING
ACCURACY
Mean Square Error (MSE)
– it measures the amount of error in statistical
models. It assesses the average squared difference
between the observed and predicted values.

Ai = actual value
 A - F 
i i
2

Fi = forecast value MSE 

n = number of fitted points
n
Σ = summation notation

9
 MEASURES OF FORECASTING
ACCURACY
Running Sum of Forecast Errors
(RSFE)
– it is an indicator of bias in the forecasts.
n
RSFE   et
et = forecast error t 1
At = actual demand n

Ft = forecast value RSFE   At  Ft

t 1

10
 MEASURES OF FORECASTING
ACCURACY
Forecast Bias
– measures the tendency of a forecast to be consistently
higher or lower than the actual demand.

• A positive RSFE indicates that the forecasts are

generally lower than actual demand which can lead to
stock outs.
• A negative RSFE shows that the forecasts are generally
higher than actual demand, which can result in excess
inventory carrying costs.
11
 MEASURES OF FORECASTING
ACCURACY
Forecast Bias
Forecast bias   (Forecast  Sales)

Forecast bias % 
 Forecast
 Sales
12
 MEASURES OF FORECASTING
ACCURACY
Tracking Signal
– is used to determine if the forecast
bias is within the acceptable control limits.

RSFE
TS 
MAD
13
• If TS >4 or <-4 something is wrong.
• Top should sum to 0 over time. If not, forecast is biased.
14
EXAMPLES
OF
FORECAST
ACCURACY
MEASURES
15
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE
Week Sales 3MA Error | Error | Error2 |%Error|

1 39
2 44 Forecast Error =
3 40
Actual - Forecast
4 45
- 41
= 4
5 38
- 43
= -5
6 43 - 41
= 2
7
8
39
- 42
40
= -3

16
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE
Week Sales 3MA Error | Error | Error2 |%Error|

1 39
2 44 Mean Absolute Deviation
3 40
2
4 45 41 |4| 4
5 38 43 | -5 | 52
2
6 43 41 | 2| 22
7 39 42 | -3 | 32
8 40 Total 14

17
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE
Week Sales 3MA Error | Error | Error2 |%Error|

1 39
2 44
Mean Squared Error
3 40
4 45 41 4 4
2
= 16
5 38 43 -5 52 = 25
6 43 41 2 22
= 4
7
8
39 42
40
-3 32
= 9
54
Total 14

18
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE
Week Sales 3MA Error | Error | Error2 |%Error|

1 39 Mean Absolute Percent Error

2 44 | Error | / Actual x 100%
3 40
4 45 41 4 4 16 8.89%
5 38 43 -5 5 25 13.16
%
6 43 41 2 2 4 4.65%
7 39 42 -3 3 9 7.69%
8 40 Total 14 54 34.39%

19
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE

Error |Error| Error2 |%Error| Mean Absolute Deviation

(MAD)

MAD 
 actual  forecast
n
4 4 16 8.89%
MAD = 3.5
-5 5 25 13.16%
2 2 4 4.65%
-3 3 9 7.69%
Total 14 54 34.39%

14 /4 20
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE

Error |Error| Error2 |%Error| Mean Square Error (MSE)

 actual - forecast 
2

MSE 
n
4 4 16 8.89%
MSE = 13.5
-5 5 25 13.16%
2 2 4 4.65%
-3 3 9 7.69%
Total 14 54 34.39%

54 /4 21
 FORECAST ACCURACY
MEASURES
Computing Error Measures: MAD, MSE and MAPE

Error |Error| Error2 |%Error|

Mean Absolute Percentage
Error (MAPE)
| actual  forecast |
( actual
x100)
MAPE 
4 4 16 8.89% n
-5 5 25 13.16%
2 2 4 4.65% MAPE = 8.60%
-3 3 9 7.69%
Total 14 54 34.39%

34.39/4 22
 FORECAST ACCURACY
MEASURES
EXAMPLE 1: Given the following data, compute the
tracking signal and decide whether or not the forecast
should be reviewed.
ACTUAL FORECAST
MONTH SALES SALES
JAN 8 10
FEB 11 10
MARCH 12 10

23
 FORECAST ACCURACY
MEASURES

ACTUAL FORECAST FORECAST

MONTH SALES SALES ERROR RSFE

JAN 8 10 -2 -2

FEB 11 10 1 -1

MAR 12 10 2 1

APR 14 10 4 5

24
 ACTUAL FORECAST FORECAST ABSOLUTE TRACKING

MONTH SALES SALES RSFE ERROR ERROR MAD SIGNAL

JAN 8 10 -2 -2 2 2 -1

FEB 11 10 -1 1 1 1.5 -0.67

MAR 12 10 1 2 2 1.67 0.6

APR 14 10 5 4 4 2.25 2.22

25
 Tracking Signal
4

0
JAN FEB MAR APR
-1

-2

-3

-4

Tracking Signal
Since the tracking signals for months January to April are within +/- 4, the forecast needs not be
reviewed.
26
EXAMPLE 2: FORECAST ACCURACY
MEASURES
ERROR ABSOLUTE ABSOLUTE %
PERIOD DEMAND FORECAST
(e) ERROR
e2 ERROR
1 1,600 1,523 77 77 5,929 4.8
2 2,200 1,810 390 390 152,100 17.7
3 2,000 2,097 -97 97 9,409 4.9
4 1,600 2,383 -783 783 613,089 48.9
5 2,500 2,670 -170 170 28,900 6.8
6 3,500 2,957 543 543 294,849 15.5
7 3,300 3,243 57 57 3,249 1.7
8 3,200 3,530 -330 330 108,900 10.3
9 3,900 3,817 83 83 6,889 2.1
10 4,700 4,103 597 597 356,409 12.7
11 4,300 4,390 -90 90 8,100 2.1
12 4,400 4,677 -277 277 76,729 6.3
TOTAL 0 3,494 1,664,552 133.8
AVERAGE 291.17 138,712.7 11.2
RSFE MAD MSE MAPE

27
 FORECAST ACCURACY
MEASURES
SOLUTION:
MAD = 291.2 MSE =
MAPE = 11.2% 138,712.7
RSFE = 0
RSF
Tracking signal = =0
E
MAD
The results indicate no bias in the forecasts, and that the tracking signal is
well within the control limits of ±3. However, the forecasts are on average
291 units or 11.2 percent off from actual demand. This situation might
require attention to determine the underlying causes of the variation.

28
THANK
YOU
Supply Chain Management
TRISHA NICOLE H. SANIDAD
BSIE – 4A