Common Measures of Error

Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n

Where:
n = total number of periods
Mean Squared Error (MSE)
∑ (Forecast Errors)2
MSE =
n

Forecast error = Actual demand - Forecast value

= At - Ft
COMPARISON OF FORECAST ERROR EXAMPLE

Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 COMPARISON OF FORECAST ERROR

∑ |cumulative
Actual
Rounded error|
Forecast
Absolute
Deviation
Rounded
Forecast
Absolute
Deviation
MAD =Tonnage with for with for
Quarter Unloaded n
a = .10 a = .10 a = .50 a = .50
1 a = .10
For 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 = 82.45/8
159 = 10.31
174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
For
5 a= .50
190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7
= 98.62/8
180
= 12.33
178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 COMPARISON OF FORECAST ERROR

∑ Rounded
(forecast
Actual
errors)
Forecast
2
Absolute
Deviation
Rounded
Forecast
Absolute
Deviation
MSE = Tonnage with for with for
Quarter Unloaded n
a = .10 a = .10 a = .50 a = .50
1
2
For a=
180
.10
168
175
175.5
5.00
7.50
175
177.50
5.00
9.50
3 = 1,526.52/8
159 174.75 = 190.82
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5For a =
190.50 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 = 1,561.63/8
180 178.02 = 195.20
1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 COMPARISON OF FORECAST ERROR
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
It is used in practice as an estimate of the standard deviation of the distribution of errors.
s = 𝑀𝑆𝐸

Control charts are based on the assumption,

 approximately 95.5% of the values can be fall within limits of 0±2𝑠
 Approximately 99.7% of the values can be expected to fall within ±3s of zero.

UCL: 0 + z 𝑀𝑆𝐸 Control limits: 0 ± z 𝑀𝑆𝐸

LCL: 0 - z 𝑀𝑆𝐸

Where:
UCL – Upper control limit
LCL – Lower control limit
z = number of standard deviations from the mean.
Example:
Compute 2s control limits for forecast errors when the MSE
is 9.0

UCL: 0 + z 𝑀𝑆𝐸 LCL: 0 - z 𝑀𝑆𝐸

=0+2 9 =0-2 9
=6 = -6
Tracking Signal
• Measures how well the forecast is predicting actual values.
• The intent is to detect any bias in errors over time.
• 0 – ideal
• Limits of ±4 or ±5 = acceptable
• Values outside the acceptable range – there is a bias in the forecast
and corrective action is needed.

෍(𝑨𝒄𝒕𝒖𝒂𝒍 − 𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕)
Tracking
signal = MAD
 TRACKING SIGNAL EXAMPLE
Cumulative
Absolute Absolute
Actual Forecast Cumm Forecast Forecast
Qtr Demand Demand Error Error Error Error MAD

1 90 100 -10 -10 10 10 10.0

2 95 100 -5 -15 5 15 7.5
3 115 100 +15 0 15 30 10.0
4 100 110 -10 -10 10 40 10.0
5 125 110 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2
 TRACKING SIGNAL EXAMPLE

Tracking Cumulative
Absolute Absolute
Signal Forecast
Actual Cumm Forecast Forecast
Qtr (CummDemand
Demand Error/MAD)
Error Error Error Error MAD

1 -10/10
90 100 = -1 -10 -10 10 10 10.0
2 -15/7.5
95 100 = -2 -5 -15 5 15 7.5
3 115
0/10 = 100
0 +15 0 15 30 10.0
4 100
-10/10 110
= -1 -10 -10 10 40 10.0
5 125
+5/11 =110
+0.5 +15 +5 15 55 11.0
6 140
+35/14.2
110= +2.5
+30 +35 30 85 14.2

The variation of the tracking signal

between -2.0 and +2.5 is within acceptable
limits
 EXPONENTIAL SMOOTHING

SMADt = MADt – 1 + a(│ Actual− Forecast│𝒕 − 𝑴𝑨𝑫𝒕−𝟏 )

where :
SMAD = new forecast
MADt – 1 = previous forecast
a = smoothing (or weighting)
constant (0 ≤ a ≤ 1)