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Forecast Measurement and Evaluation

by George E. Palmatier

page 1 of 6:

As companies improve planning and control through the implementation of such processes as Sales and Operations Planning (S&OP) and Demand Planning, the issue of forecast accuracy always surfaces. The following questions often arise:

• How should we measure forecast accuracy?
• How good a forecast should we expect?
• How do we measure the effectiveness of our demand planning process?

The Importance of Forecasting - Companies striving for operational excellence and a competitive advantage realize the impact forecasting has upon the ability of a company to satisfy its customers and to simultaneously manage its resources. Effective forecasting helps management resolve the dilemma of more demanding customer requirements and greater shareholder expectations.
To resolve this dilemma, managers are expected to provide better customer service with fewer resources. In this environment, the importance of effective forecasting is elevated. In manufacturing and distribution companies, a forecast is not simply a projection of future business;
it is a request for product (or a request for resources to ensure supply of a product). In simple terms, this is how the forecast works: If a product is in the forecast, you can expect the product (or resource) to be available. If it is not in the forecast, you should not expect the product to be available. With this concept of a forecast as a request for product, forecast accuracy becomes crucial to ensuring satisfactory, or exemplary, customer service. Forecast accuracy also becomes critical to the proper utilization of resources. For example, when product is requested and not sold or the sale is delayed, resources have been tied up unnecessarily. When a product has not been forecasted but the company must still meet the customer demand, often this is accomplished at a considerably higher cost – a poor use of resources.

Why Measure Forecast Accuracy? First and foremost, we need to measure forecast accuracy if we wish to improve. Measurements are used to make improvements to the specific forecast as well as to the demand planning process. An effective demand planning process measures forecast accuracy in different ways for different purposes. A detailed measure of forecast accuracy at the item level identifies individual products that are outside an established tolerance. This enables us to review – and correct – the individual product forecasts. The earlier a significant forecast error is identified, the quicker we can respond to the real market demand.

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Forecast Measurement and Evaluation

by George E. Palmatier

George Palmatier is a principal with the Oliver Wight Companies. He works with senior management of client companies to achieve results which provide a competitive advantage. George is a co-author of several books:
Enterprise Sales and Operations Planning,
Demand Management Best Practices, and
The Marketing Edge.