## Key Performance Indicators (KPIs) in Demand Planning

By Intelichain’s Team

Key Performance Indicators (KPIs) are critical metrics that help organizations measure the effectiveness and efficiency of their demand planning processes. By tracking these KPIs, companies can identify areas for improvement, enhance forecast accuracy, optimize inventory levels, and ultimately drive better business outcomes.

__Index__:

Parameters:

Actual demand at period \( i \), \( A_i \)

Demand forecast for period \( i \), \( F_i \)

## Essential Demand Planning KPIs

**Forecast Accuracy (FA)**

__Definition__: Measures the accuracy of the demand forecasts compared to the actual sales.

__Importance__: High forecast accuracy indicates reliable predictions, reducing the likelihood of stockouts or excess inventory.

Formula:

$$ FA = {1-} \frac{\sum_{i=1}^n |F_i - A_i|}{\sum_{i=1}^n A_i} $$

__Mean Absolute Percentage Error__** (MAPE)**

__Definition__: Measures the average absolute percentage error between forecasted and actual sales.

__Importance__: Provides a clear understanding of forecast accuracy in percentage terms, making it easy to interpret and communicate.

Formula:

$$ \text{MAPE} = \frac{100}{n} \times \sum_{i=1}^n \left| \frac{F_i - A_i}{A_i} \right| $$

__Bias__

__Definition__: Indicates whether forecasts are consistently overestimating or underestimating demand.

__Importance__: Identifying bias helps correct systematic errors in the forecasting process.

Formula:

$$ \text{Bias} = \frac{\sum_{i=1}^n (F_i - A_i)}{n} $$

__Mean Absolute Deviation__** (MAD)**

__Definition__: Measures the average absolute difference between forecasted and actual sales.

__Importance__: Helps assess the consistency of forecast errors.

Formula:

$$ \text{MAD} = \frac{\sum_{i=1}^n |F_i - A_i|}{n} $$

__Tracking Signal__** (TS)**

__Definition__: Measures the consistency of forecast errors over time, indicating when the forecasting model needs adjustment.

__Importance__: Helps maintain forecast reliability by signalling when corrective actions are necessary.

Formula:

$$ \text{TS} = \frac{\sum_{i=1}^n |F_i - A_i|}{\text{MAD}} $$

__Inventory Turnover Ratio__** (ITR)**

__Definition__: Measures how often inventory is sold and replaced over a time (usually a year).

__Importance__: High inventory turnover ratio indicates efficient inventory management and good demand planning.

Formula:

$$ \text{ITR} = \frac{\text{Cost of Goods Sold per time}}{\text{Average Inventory}} $$

__Stockout Rate__

__Definition__: Measures the percentage of the number of times in which inventory is not available when needed.

__Importance__: High stockout rates indicate poor demand planning and lost sales opportunities.

Formula:

$$ \text{Stockout Rate} = \frac{\text{# of Stockouts}}{\text{A Total # of Demand Occasions}} $$

__Service Level__** (SL)**

__Definition__: Measures the ability to meet customer demand without stockouts.

__Importance__: High service levels indicate effective demand planning and customer satisfaction.

Formula = Φ[(D - μ) / σ]

Where:

**Φ**= The cumulative distribution function (CDF) of the standard normal distribution.**D**= Demand during the lead time.**μ**= Mean demand during the lead time.**σ**= Standard deviation of demand during the lead time.

__KPIs Summary__

Effective demand planning relies on tracking and analyzing KPIs to ensure accuracy and efficiency. Monitoring KPIs, is the first step for organizations looking to continuously improve their demand planning processes. These KPIs provide valuable insights into performance, helping businesses make data-driven decisions, optimize inventory and enhance customer satisfaction.