The Empirical Evidence
Steve Morlidge presents results from two test datasets (the first with high levels of manual intervention, the second with intermittent demand patterns), intended to challenge the robustness of the avoidability principle.
The first dataset contained one year of weekly forecasts for 124 product SKUs at a fast-moving consumer goods manufacturer. This company had a high level of promotional activity, with frequent manual adjustments to the statistical forecast. The histogram shows the ratio of the Mean Absolute Error (MAE) in their forecasts, compared to the MAE of the naive forecast. (Recall that when using MAE instead of MSE, the "unavoidability ratio" is at 0.7, as indicated by the vertical reference line.)
Results from the second dataset (880 SKUs across 28 months, with intermittent and lumpy demand) were similar.
The first observation is that relatively few items have the MAE ratio below 0.7 (and almost none below 0.5). Steve suggests that a ratio around 0.5 for MAE (less for MSE) may represent a useful lower bound benchmark for how good you can reasonably expect to be at forecasting.
The second observation is the large number of SKUs with a ratio above 1.0 -- meaning that the naive forecast was better! (In both datasets, over 25% of SKUs suffered this indignity!) These are examples of negative Forecast Value Added.
PLEASE TRY THIS AT HOME!
To further assess the usefulness of the avoidability concept, Steve welcomes participation from companies willing to further test and refine the approach. If you have data (suitably anonymized) you are willing to share, or have other questions or comments, you can reach him at email@example.com.
At the very least, pull some of your own data and give the approach a try -- it's easy. Here is an example of the calculation, for one SKU over 52 weeks. All you need is the Forecast and the Actual over the choosen time period, and it is easy to recreate the naive (random walk) forecast from the Actuals:
In this example the avoidability ratio was > 1.0 (using either MAE or MSE), indicating a very poor forecast that was actually worse than a naive forecast, and was also significantly biased (averaging nearly 5% too low). A good (value adding) forecasting process will deliver ratios < 1.0, and (we hope) get down below 0.7 for MAE (or 0.5 for MSE).