What to measure for forecast accuracy?

What to measure for forecast accuracy? SKU/DC, SKU/National or SKU/Plant?

It is now well settled that we want to use the Weighted MAPE to measure the quality of the demand plan.            

This can be done in a portfolio of measures:      

1. Weighted MAPE at the SKU/DC level to measure distribution planning
2. Forecast Bias to evaluate persistent forecast bias
3. Some measure of SKU-Mix Error

Although most demand planners and COE professionals understand the mechanics of these measures, there is some confusion on what to measure and why.

This all depends on what you are trying to drive – what you are using the forecast for? So level of aggregations matter as well.

Some simple rules:

1. SKU sold and shipped in many DCs but made in a single plant – the Plant cares about the quality of the consolidated plan.

2. SKU/Customer level measure will be helpful to evaluate the quality of the promotional forecasts and Sales Manager’s performance.

3. A common Raw Material is used in producing multiple SKUs. Potato is used in making chips, French Fries, Potato pies with the Potato as the raw material. Procurement cares about the quality of the Potato plan. This is derived from the FG demand but consolidated to the Ingredient level. So measure a long-term horizon at an aggregated level.

Doing the above will need other nuances – you need to have the hierarchy defined in such a way that your demand could be aggregated to the raw material level.

4. A common resource is used to produce multiple products. To evaluate the capacity for this resource, the capacity planner cares about the quality of the long-term forecast aggregated to the resource level.

You can list a variety of examples and circumstances – but it is important to define what the demand plan is expected to solve and who is using this. Then we define the measure appropriately.

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