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Forecast Error Economics for an Inventory Planning System
[CBP WP 58-12]



Forecast Error Economics for an Inventory Planning System
This paper develops a series of simple economic models for estimating the cost of a poor forecasting system. The paper considers the cost of the carrying inventory due to higher than needed safety stock and/or forecast bias and also the lost gross margin from customers due to inadequate safety stock. Through a series of models and discussions, the paper proposes a methodology for auditing and improving a forecasting system. The audit list in the last section should be a good tool for any firm desiring to audit its forecasting system. This paper is closely related to the paper entitled “Forecast Error Metrics.”

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