Calculating demand forecast accuracy is the process of determining the accuracy of forecasts made regarding customer demand for a product.
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Understanding and predicting customer demand is vital to manufacturers and distributors to avoid stock-outs and maintain adequate inventory levels. While forecasts are never perfect, they are necessary to prepare for actual demand. In order to maintain an optimized inventory and effective supply chain, accurate demand forecasts are imperative.
Forecast accuracy in the supply chain is typically measured using the Mean Absolute Percent Error or MAPE. Statistically MAPE is defined as the average of percentage errors. Most practitioners, however, define and use the MAPE as the Mean Absolute Deviation divided by Average Sales. This is in effect a volume weighted MAPE. This is also referred to as the MAD/Mean ratio.
A simpler and more elegant method to calculate MAPE across all the products forecasted is to divide the sum of the absolute deviations by the total sales of all products.
The forecast error needs to be calculated using actual sales as a base. There are several forms of forecast error calculation methods used, namely Mean Percent Error, Root Mean Squared Error, Tracking Signal and Forecast Bias..
Reference class forecasting was developed to reduce forecast error and increase forecast accuracy.[1]