Forecasting Error Calculator
If you're new here, you may want to get Mercury's Blog by Email or subscribe to my RSS feed. Thanks for visiting!
The spreadsheet linked below shows the basic calculation of the costs of a forecasting error.
In this example, the cost of a 1% error in forecasting on 800 million in sales is determined. For each 1% of forecasting error, there is a cost of 3.03 million for underforecasting and 3.65 million for overforecasting. Typically, forecasting is generally incorrect by several percentage points.
If this company were to institute a prediction market, a decrease in forecasting error by just 1 percent could save between 3.03 and 3.65 million. It’s not unusual for a prediction market to decrease forecasting error by 3-5 percentage points.
If you would like a copy of the original spreadsheet, just e-mail me by clicking on this link or download it directly by clicking here.
The formulas come from an editorial by Professor Chaman L. Jain of St. John’s University, found in the Winter 2003-2004 issue of the Journal of Business Forecasting.