Sales Forecast Accuracy (B)
What is the definition of sale forecast accuracy? What is the effect of low forecast accuracy?
Posted: Aug 2009
The Sales Forecasting is complex cross-functional process that leads to sales forecast document that described forecasted sales volume. The Forecasted sales volume is developed on the level of SKU, week, month, ...
The accurate forecast is important, since any inaccuracy is leading to write offs or stock-outs. Both situations are directly influencing the profit of the company. In order to measure the effectiveness of sales forecasting it is necessary to measure the Forecast Accuracy. The forecast accuracy is measured by the formula:
FA = 1 – Abs Err / Sales
Absolute error is the total difference between forecast and sales. Example:
Sales Forecast for was
Actual Sales was
Absolute Error is
FC ( A ) = 100 cases
ACT ( A ) = 90 cases
Abs Err = | 100 – 90 | = 10
Therefore the Forecast Accuracy in this case is:
FA ( A ) = 1 – 10 / 100 = 90 %
Of course, every company sells many product in different categories. The forecast accuracy is measured for every SKU, but also on the level of category and total portfolio. Also, the forecast should be measured on weekly and monthly level.
The target for forecast accuracy is matter of company policy and historical data. Normally it should be at least between 80% and 90%. It is necessary to keep the forecast accuracy as high as possible. Inaccuracy is directly impacting the sales of the company.
For example, if the forecast for the product B was 100 cases in may, consider the following two scenarios.
1.) Sales was 75 cases, the accuracy was 75%. This means that 25 cases is left at the end of the month in the warehouse. This may lead to potential write off if the product expires.
2.) Sales was 125 cases, the accuracy was 75%. Since supply chain was planning to cover the demand as it was forecasted, the stock out occurred. The company lost potential sales and profit.
The alternative solution for covering potential stock-outs is increasing of safety stock. Still, significant increase of safety stock is leading to blocking of working capital and potential write off if the sales is significantly below forecast.
The sales forecast accuracy through proper planning of sales forecast is of crucial importance for the company, in order to avoid write offs and lost sales due to stock-out.