KNOW THE FORECASTING METHODS IN THE CONSTRUCTION OF A PLANNING

THROUGH A TOTAL COST

Recognizing one of the most important criteria for choosing a forecasting method is its

accuracy, that is, how close the actual event predicts. Significantly, the talk of forecasting

method is to accept as good and the forecast error in which it is calculated based on the

difference between the forecast and the actual values. The mean absolute deviation (MAD), the

mean square error (MSE) and the mean absolute percentage error (MAPE) are used as typical

measures to determine the accuracy of forecasting methods. In addition, the accumulated forecast

error (CFE), the number of faults (NOS) and the period in stock (PIS) have been proposed to

overcome the shortage of the previous measures. However, these measures have an obvious

limitation in some applications. For this reason within the planning is an aggregate production,

there we can observe the demands of forecast which are used to build the planning of the

production that determines the quantity of production, the level of employment, the level of

inventory and other values of decision for the next two months or a year to minimize the total

cost

It should be noted that by proposing a measure based on total cost that is a function of

overestimation and underestimation. Taking into account that the overestimation and

underestimation carry the inventory and the pending order cost respectively, the new measure is

able to reflect the total cost incurred by demand forecasts. With this measure we can say which

forecasting method is desirable for APP. As explained by the author we can say that it

introduces a new measure, where it is based on the total cost, called Cumulative absolute forecast

error (CAFE), this in turn describes an aggregate production planning model that is used in

experiments presents extensive simulation results. In particular, these measures are determined
based on the difference between the actual demands and the forecasts during the period.

However, these measures are widely used because of their simplicity, they can not indicate how

serious the error is with regarding the size of the demand. These measures are useful for

accessing the accuracy of the forecasting method in a series of data, but they are not significant

for determining the accuracy of a forecasting method in multiple data series (Hyndman &

Koehler, 2006). It must be taken into account that the MAPE (average absolute percentage error)

and sMAPE (absolute percentage symmetric average error), respectively, are designed to

overcome this shortage. In general, MAPE and sMAPE are prognostic error ratios to actual

demand or the average of actual and predicted demands. These measures allow estimating

approximately how much damage can be caused by a forecast error.

Arriving at this point, we find an optimal production plan that minimizes the total cost,

including shortage and inventory cost. Since the optimal plan must be set up in advance with the

forecast demands, the actual total cost produced by this plan is determined later when the actual

demands are made. A very important aspect is the production planning based on the forecast of

the demand might not be optimal with the real demands. In general, the forecast error can be

explained with its variability and bias. We also talk about the variability in the sum absolute

values of the differences between the forecasts and the real demands, while the bias is the

cumulative sum of the differences. It is very clear that a good forecasting method minimizes the

variability and bias of forecast errors. For this reason, the bias occurs with a more serious

negative impact on production planning than variability, since the bias causes a continuous

increase in inventory or a delay.

Talking about the Makridakis competitions, which are known as M-Competitions, are a

series of competitions structured by teams led by the forecasting researcher Spyros Makridakis
who propose to evaluate and compare the accuracy of different forecasting methods in multiple

series, They cover a wide range of real life conditions (Makridakis & Hibon, 2000). To know M-

Competition, the 15 forecasting methods are applied to predict the 1001 series of weather.

Competition M has been extended to competitions M2 and M3, including more time series data

and forecasting methods especially.

Therefore, the time series included annual, quarterly, monthly, daily and other time series,

and samples were taken from micro, industry, macro, finance, demography and other domains.

Many studies considered the impact of forecasts on financial and inventory performance.

Gardner (1990) considered inventory performance in relation to inventory investment and

customer service in the forecast. He showed that the impact of the forecast model could be

represented as a compensation curve between inventory investment and customer service. This

paper proposes a new evaluation measure for forecasting methods, Cumulative absolute forecast

error (CAFE). Given that the existing measures are designed according to the variation and the

error of prognosis of bias, the measures can not adequately explain a result or damage, especially

the planning of the aggregate production, result of the forecast

It should be noted that the performance of the aggregate production planning depends to a

large extent on the accuracy of the predicted demand, choosing an adequate forecasting method

and a measure must be a prerequisite to establish a good planning of the aggregate production.

Typical measures for forecast accuracy, such as MAD, MSE, MAPE and CFE, are designed only

to measure the difference between actual demands and those of the forecast. In fact, they are not

able to consider any result of forecast error, such as increasing the cost or decreasing the profit

and, consequently, they do not give enough explanation to select a good forecasting method in
the planning of the aggregate production. This is a major drawback for industry professionals. To

overcome this limitation of the typical measures, this document suggested a new measure, CAFE

In summary, for this study, it is necessary to know an active feedback process to apply this

approach successfully to a real field. With various scenarios, it can be established or organized as

a guide on how these methods can be used to select optimal values for weight factors. On the

other hand, this study shows that CAFE is highly correlated with the total cost caused by an

aggregate production planning. With this measurement characteristic, a new forecasting method

can be designed to minimize the total cost

 Bibliography

Gardner, E. (1990). Evaluating forecast performance in an inventory control system. Management Science

36, 490-499.

Hyndman, R. J., & Koehler, A. B. (06 de 2006). Another Look at Forecast Accuracy Metrics for

Intermittent Demand. Recuperado el 25 de 02 de 2019, de ResearchGate:

https://www.researchgate.net/publication/5055536_Another_Look_at_Forecast_Accuracy_Metric

s_for_Intermittent_Demand

Makridakis, S., & Hibon, M. (2000). The M3-competition: Results, conclusions and implications.

International Journal of Forecasting, 16, 451–476.