You forecast future demand of products and services. Your business model is based on these forecasts. But have you ever stopped to determine the accuracy of your demand forecasts? In a recent study we conducted for the National Association of Wholesale Distributors we found that the average forecast error (i.e., the difference between the forecast and actual sales or usage) was more than 300%! In order to make the most of your people, machinery, inventory and other resources, calculate your forecast error for every stocked product by using the equation:
[Absolute Value of (Forecast – Sales or Usage)] ÷ the Lower of Sales or Usage
For example if there is a forecast of 100 pieces and corresponding actual sales equal 50 pieces the resulting forecast error is 100% [Absolute Value of 100 – 50) ÷ 50].
Acceptable forecast errors will vary from company to company and even from product to product. But you should always be concerned with forecast errors that exceed 100%. Pay particular attention to the forecast error for products that are sold or used on a regular basis. If the forecast error is too high, you are forced to overstock in order to maintain your desired level of product availability.
Effective Inventory Management, Inc.