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Measures of Forecast Error

Forecast error is measured in different ways, including as an absolute value or percentage. It is the difference between actual and forecast demand. Demand has both systematic and random components. Systematic includes trends, seasonality, and current levels while random includes things like natural disasters. Bias measures consistent over or under forecasting as the cumulative forecast differs from actuals. Forecast accuracy is measured using metrics like mean squared error (MSE), mean absolute deviation (MAD), and mean absolute percentage error (MAPE). Lower values indicate better accuracy.

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Ritam Ghosh
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37 views12 pages

Measures of Forecast Error

Forecast error is measured in different ways, including as an absolute value or percentage. It is the difference between actual and forecast demand. Demand has both systematic and random components. Systematic includes trends, seasonality, and current levels while random includes things like natural disasters. Bias measures consistent over or under forecasting as the cumulative forecast differs from actuals. Forecast accuracy is measured using metrics like mean squared error (MSE), mean absolute deviation (MAD), and mean absolute percentage error (MAPE). Lower values indicate better accuracy.

Uploaded by

Ritam Ghosh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Measures of

forecast error
Forecast error is
the difference
between actual
demand and
services

forecast demand,
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stated as an
absolute value or
as a percentage
Observed demand (O) = systematic component (S)
+ random component (R)

Systematic Random

Demand
services

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Components of
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Examples of Random
systematic demand
Component
• Level (current
deseasonalized • Natural Disasters
demand) • Recession
• Trend (growth or
decline in demand)
• Seasonality
(predictable seasonal
fluctuation)
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services
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Demand
Bias Random

Reasons
• Bias is a consistent
services

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deviation from the mean in
Examples of Random
one direction (high or low).
A normal property of a Component
good forecast is that it is
not biased. • Natural Disasters
• Recession
• Bias exist when the
cumulative actual demand
differs from the
cumulative actual
forecast.
1 2

???
services

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Check validity

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Preparing a

Why
of forecasting contingency
method plan of action
MSE MAD

timeline
history
about
Average of the
squares of the errors Average of the
over n periods modulus of the errors
over n periods
2 Forecast method has the following error sequence:

Forecast Method 1 = 10,12,9,9


Forecast Method 2 = 1,3,2,20

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Error
MSE MAD
Forecast Method 1 = 101.5 Forecast Method 1 = 10
Forecast Method 2 = 103.5 Forecast Method 2 = 6.5
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services
teams Mean Absolute Percentage Error

Error
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2 Forecast method has the following error sequence:

Forecast Method 1 = 190, 200, 245, 180


Forecast Method 2 = 100, 120, 500, 100
services

timeline
history
Average demand during the 4 quarters are 1000, 1200,
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4800,1100

Results
MSE – Method 1 is better
MAD – Method 1 is better
MAPE – Method 1 =14.3%
Method 2 = 9.9%(better)
Tracking Signal
services

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Tracking
Signal
Tracking Signal acceptable if it is between +- 6

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