MEASUREMENT OF ERROR IN FORECASTING

MEASUREMENT OF ERROR IN FORECASTINGBy-: Alok Kumar YadavMBA Ist YearIILM Academy Of Higher LearningGreater Noida

FORECASTINGForecasting is a tool used for predicting future demand based onpast demand information.2The 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 ConceptForecast Error :

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

Basic ConceptMean 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. 5Mean Absolute Deviation

MEAN SQUARE ERRORMean 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 random8Mean Absolute Percentage Error

9Forecast Error CalculationPeriodActual(A)Forecast(F)(A-F) Error|Error|Error2[|Error|/Actual]x1001107110-3392.80%212512144163.20%31151123392.61%4118120-2241.69%51081091110.93%Sum133911.23%n = 5n-1 = 4n = 5MADMSEMAPE= 2.6= 9.75= 2.25%10Benefits

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