Effect of Forecast Accuracy on Inventory Optimization Model

In this study, we examine the effect of forecast accuracy on the inventory costs incurred by a national retailer using a dynamic inventory optimization model. In the past, the retailer calculated demand forecasts at a... [ view full abstract ]

In this study, we examine the effect of forecast accuracy on the inventory costs incurred by a national retailer using a dynamic inventory optimization model. In the past, the retailer calculated demand forecasts at a particular distribution center by dividing the annual demand with specific numbers which led to a flat ordering model. This led the retailer to purchase items in bulk from their vendors incurring unnecessary holding costs. This type of purchase behavior does not adequately prepare a supply chain for unexpected demand and thus might further deepen inventory troubles. We introduced to this retailer an easy to deploy inventory model that uses the distribution of demand for each item along with the target service level among other constraints like the purchase capacity etc., to minimize the overall cost for each item. We then show the impact of inventory costs based on how accurate the demand forecast is.