Recoupling the Forecasting and Stock-Control Processes

The integration of demand forecasting and inventory control is an area that deserves increased attention from practitioners as well as more research work from academics. In inventory planning, there is an explicit linkage between the variance of the forecast errors over the replenishment lead time and the calculation of safety stocks. If the calculation of the forecast error variance is flawed, then the calculation of the safety stocks will be flawed too. The implications can be dramatic: if stocks are too high, there is a financial penalty. If they are too low, service levels will be compromised. In this article, Steve Morlidge and Aris Syntetos describe common but critical mistakes in the calculation of the lead-time forecast error variance and discuss the implications for setting safety stocks. They explain what the mistakes are and where they're coming from, and they provide estimates of their consequences. The authors argue that resolving such problems goes beyond the actual technicalities to include closer communication between demand forecasters, inventory controllers, and suppliers of the software in use. Copyright International Institute of Forecasters, 2017