There are two main reasons why an inventory control system needs to order items some time before customers demand them. First, there is nearly always a lead-time between the ordering time and the delivery time. Second, due to certain ordering costs it is often necessary to order in batches instead of unit for unit. This means that we need to look ahead and forecast the future demand. A demand forecast is an estimated average of the demand size over some future period. But it is not enough to estimate the average demand. We also need to determine how uncertain the forecast is. If the forecast is more uncertain, a larger safety stock is required. Consequently, it is also necessary to estimate the forecast error, for example represented by the standard deviation or the Mean Absolute Deviation (MAD).
KeywordsForecast Error Forecast System Future Period Inventory Control Mean Absolute Deviation
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