Question

Describe the relationship between forecast accuracy and safety stock for uncertain demand.

Answer 1

We can say that the quality of forecast, when mathematically considered, is inversely proportional to the accuracy of the estimates. What this means is that the better we have an understanding of the demand through an accurate forecast, the easier it gets to manage uncertainty and the less safety stock we would need to hold to overcome this uncertainty. The better we can make our forecasts, the more actual stock can be used to satisfy the demand, reducing the need for increased inventory and safety stock.

Uncertain demand, however, creates many problems, since future variables need to be considered, even with a high probability of demand pattern being closer to the forecast, we would need to retain safety stock. But, the closer we can be, the easier it is to determine both actual demand and safety stock, reducing the inventory as much as possible.

** Leaving a thumbs-up would really help me out. Let me know if you face any problems.