Reality of Forecasting

●Forecasts are usually wrong!

❖ Aggregate forecasts are more accurate than
individual forecasts
❖ Long-range forecasts are less accurate than short -
range forecasts

●Forecasts should, therefore, be accompanied by a

measure of forecasting error.
Forecast Errors
● Forecast error is the difference between the forecast value
and what actually occurred.
❖ Forecast errort = Actualt –Forecastt
❖ et =A t − Ft

● Measures of Error
❖ Mean absolute deviation (MAD)
❖ Mean absolute percent error (MAPE)
❖ Mean squared error (MSE)
Measuring Forecast Errors: Mean Absolute
Deviation (MAD)
nn

A
t=1
t - Ft
t=1
MAD
MAD==
n
❖ The ideal Mean Absolute Deviation (MAD)is zero which would mean there is
no forecasting error at all.

❖ The larger the MAD, the less the accurate the resulting model.

❖ Mean Absolute Percent Error (MAPE) gauges the error relative to the average
demand.
▪ MAPE = MAD / Average Demand
Measuring Forecast Errors: Mean Forecast Error
(MFE)

Period Demand Forecast Error

1 130 - -

2 155 130.00 25.00

3 145 155.00 -10.00

(25+(-10)+15+(-9)+(-8))/5
= 2.60
4 160 145.00 15.00

5 151 160.00 -9.00

6 143 151.00 -8.00

Mean Forecast
Error = 2.60