Calculating Forecast Accuracy & Forecast Error
- Calculating Forecast Accuracy and Forecast Error
Calculating forecast accuracy, in relation to the supply chain, is typically measured using the Mean Absolute Percent Error or sometimes called MAPE. Statistically MAPE is defined as the average of percentage errors. Most inventory planners, however, define and use the MAPE as the Mean Absolute Deviation divided by Average Sales.
Being able to more accurately calculate forecasts increases your effectiveness to serve customer demand while lowering overall operational costs in the process. The forecast accuracy calculation provides a quantitative estimate of the expected quality of the forecasts.
To do this, you will need to calculate the exponentially smoothed forecast error to have a good understanding of your accuracy.
Calculating Forecast Accuracy and Forecast Error
For inventory optimization, the estimation of the forecasts accuracy can serve several purposes:
- It indicates that a product has moved from one demand type to another. In this case, a better forecasting technique needs to be applied by identifying in which demand pattern the item belongs.
- To prioritize the products that need the most dedicated attention because raw statistical forecasts are not reliable enough.
- As an input to the safety stock calculation.
Some Enterprise Resource Planning (ERP) and inventory management systems calculate for demand forecasting error, but not all items. The big question is what happens next after you know your forecast error for each item you carry in inventory? The most common practice for most companies is that they will continue managing procurement and planning the same old way, which typically is manually a lot of work. The planners will use their current system to calculate reorder points even if the forecast error is still high for certain items.
A better way and more efficient system approach is to onboard additional system automation to help planners more effectively track forecast errors when executing replenishment. Inventory optimization software works in collaboration with ERP’s and other inventory management systems to extend more.
Find out how to improve your forecasting accuracy to decrease overstocking, reduce risk of run out, and boost your customer service. Download our free white paper here!