“What would you consider a good level of forecast accuracy in our business?” is probably the single most frequent question we get from customers, consultants and other business experts alike.
Unfortunately, asking this question is a fool-proof way to make us squirm. We have years of experience developing and fine-tuning advanced forecasting, with tons of data on the results, so the squirming is not due to us being unable to answer the question. Rather it is the result of very Finnish supply chain engineers trying to find a way of saying, in the nicest possible way, that the question is the wrong one.
Why then do we think we are doing people a favor by not answering their completely reasonable question?
Firstly, because in any retail or supply chain planning context, forecasting is always a means to an end, not the end itself. We need to keep in mind that a forecast is relevant only in its capacity to enable us to achieve other goals, such as improved on-shelf availability, reduced food waste, or more effective assortments.
Secondly, although forecasting is an important part of any planning activity, it still represents only one cogwheel in the planning machinery, meaning that there are other factors that may have a significant impact on the outcome. Oftentimes, the importance of accurate forecasting is truly crucial, but from time to time other factors are more important to attaining the desired results. (You can read more about how this can be seen in a store replenishment context in a recent master’s thesis commissioned by RELEX.)
Therefore, setting a specific goal for forecast accuracy may cause an organization to get side-tracked and lose sight of the big picture. In the worst case, a lot of resources are spent on improving forecasts that are already good enough for their purpose, while too little resources are spent on forecasts that are critical to operational efficiency or working on improvements that have a bigger impact on the desired result.
Setting a specific goal for forecast accuracy may cause an organization to get side-tracked and lose sight of the big picture.
This is the reason why we strongly recommend organizations to primarily focus on the KPI’s that are directly linked to the goals of the business, such as profitability and efficiency, and go back to analyzing forecast accuracy when it is identified as a potential root cause of unsatisfactory results.
We are, of course, not saying that you should stop measuring forecast accuracy altogether. It is an important tool for root cause analysis and for detecting systematic changes in forecast accuracy early on.
However, to get truly valuable insights from measuring forecast accuracy you need to understand:
1. The role of demand forecasting in attaining business results. Forecast accuracy is crucial when managing short shelf-life products, such as fresh food. However, for other products, such as slow-movers with long shelf-life, other parts of your planning process may have a bigger impact on your business results. Do you know for which products and situations forecast accuracy is a key driver of business results?
2. What factors affect the attainable forecast accuracy. Demand forecasts are inherently uncertain; that is why we call them forecasts rather than plans. In some circumstances demand forecasting is, however, easier than in others. Do you know when you can rely more heavily on forecasting and when, on the contrary, you need to set up your operations to have a higher tolerance for forecast errors?
3. How to assess forecast quality. Forecast metrics can be used for monitoring performance and detecting anomalies, but how can you tell whether your forecasts are already of high quality or whether there is still significant room for improvement in your forecast accuracy?
4. How the main forecast accuracy metrics work. When measuring forecast accuracy, the same data set can give good or horrible scores depending on the chosen metric and how you conduct the calculations. Do you understand why?
5. How to monitor forecast accuracy. No forecast metric is universally better than another. Do you know what forecast accuracy metrics to use and how?
In our Measuring Forecast Accuracy: The Complete Guide we explain these facets of forecasting and why forecast accuracy is a good servant but a poor master in more detail. Have a look!