Benchmarking Forecasting Errors

BENCHMARKING FORECASTING ERRORS By Chaman L. Jain, St. John’s University E E very decision is based on some kind of forecast about the future. The more accurate our forecasts, the better would be our decisions. It is impossible to have a 100% accurate forecast, which may happen once in a blue moon, but not all the times. This raises a question how much error can we afford. The answer depends on the following: 1. Cost of an Error: The higher the cost, the less error we can afford. There is a cost of error when we over- forecast and a cost of error when we under-forecast. The cost of an over- forecasting error stems from holding excess inventory and offering special discounts to dispose of surplus products and obsolescence. The cost of an under-forecasting error stems from an increase in production and expediting costs as well as from the loss of sales because of stock-outs. A recent study by the author shows that companies lose as much as $130 million a year for each percent of over-forecasting error, and as much as $2.37 million a year for each percent of under-forecasting error. The study was based on mid- and large-size companies. 2. Adjustment Capability ...