Design for Change: The new Troublemakers
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Thick is a strategic design consultancy focussed on making a positive impact on the world. This presentation, by Kelsey Schwenk, was part of Oxfam's Design of Change panel event for Vivid Ideas 2015 in Sydney
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what does K means in ABC segmentation of product for demand forecasting
In ABC segmentation for demand forecasting, the addition of K represents the incorporation of Kraljic's Matrix principles. Kraljic's Matrix is a procurement strategy tool used to categorize products based on supply risk and impact on business profitability. When applied to ABC segmentation, the "K" factors in supply-side considerations alongside demand patterns.
Heres a brief overview:
A-category items (high-priority): Products with high demand and significant revenue contribution. They might also be strategic in terms of procurement and could fall under strategic items in Kraljic's Matrix.
B-category items (medium-priority): Moderate demand and revenue impact. Typically classified as leverage or bottleneck items in Kraljic's Matrix.
C-category items (low-priority): Low demand and revenue contribution. These often overlap with routine items in the matrix.
Integrating the "K" concept ensures that both demand patterns and supply risk are optimized, leading to better forecasting and inventory decisions. It's particularly useful in industries with fluctuating supply chain dynamics. Does this concept align with what you're exploring in your preparations?
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Mean Squared Error (MSE) is preferred over Mean Absolute Percentage Error (MAPE) for products with low or intermittent demand2. Here's why:
MAPE can become unreliable when actual demand values are close to zero, as it calculates errors in percentage terms. For example, if the forecast predicts 2 units but actual demand is 1 unit, the error percentage becomes disproportionately high.
MSE, on the other hand, focuses on the magnitude of errors without scaling them to percentages. It is particularly useful for products with sporadic or unpredictable demand patterns, where absolute error values provide a clearer picture of forecast accuracy.
This approach ensures that forecasting models remain robust even for niche or irregularly sold items. Does this align with your experience in demand planning?
mape formula
The formula for Mean Absolute Percentage Error (MAPE) is:
=
1
Actual
Forecast
Actual
100
Where:
Actual = Observed or real value
Forecast = Predicted value
n = Total number of observations.
It calculates the average percentage error between forecasts and actual values, making it a widely used metric in demand planning. It works best when actual values are not close to zero, as the percentage can become skewed in such cases.
Does this help clarify its usage in your analysis?
difference between BIAS and MAPE
BIAS and MAPE are both metrics used to evaluate forecast accuracy, but they serve distinct purposes:
BIAS:
Definition: Measures the tendency of forecasts to consistently over-predict or under-predict demand.
Formula:
=
(
Forecast
Actual
)
Key Insight:
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