HOW TO MEASURE THE COST OF A FORECAST ERROR With growing competition from home and abroad, it is becoming more important than ever to improve forecasts in order to cut costs and increase sales. The over-forecasting error increases the cost of inventory, transshipment and obsolescence. The under-forecasting error, on the other hand, increases the cost of production, procurement and transportation, as well as causes a potential loss in sales. How much improvement can you make in a forecast (how much error can you reduce) depends not only on the product and the industry you are in but also on how much resources and efforts you invest in? Furthermore, some products are more difficult to forecast than others. New products and products that are highly promoted and volatile are generally more difficult to forecast. How much error can you reduce also depends on the stage you are in? If you are in the initial stage of development of a forecasting function, where many companies are at the present time, it would much be easier to reduce it. But, as the function matures, and you already have substantially reduced the error, further reduction will be harder and more costly. It is true that you ...

From Issue: Winter 2003
(Winter 2003-2004)

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How to Measure the Cost of a Forecast Error