Optimising Forecasting Models for Inventory Planning

Lancaster University Management School Management Science Working Paper 2019:2

33 Pages Posted: 30 Apr 2019

See all articles by Nikolaos Kourentzes

Nikolaos Kourentzes

Lancaster University - Department of Management Science

Juan R. Trapero

University of Castilla-La Mancha

Devon K Barrow

University of Birmingham - Birmingham Business School

Date Written: March 25, 2019

Abstract

Inaccurate forecasts can be costly for company operations, in terms of stock-outs and lost sales, or over-stocking, while not meeting service level targets. The forecasting literature, often disjoint from the needs of the forecast users, has focused on providing optimal models in terms of likelihood and various accuracy metrics. However, there is evidence that this does not always lead to better inventory performance, as often the translation between forecast errors and inventory results is not linear. In this study, we consider an approach to parametrising forecasting models by directly considering appropriate inventory metrics and the current inventory policy. We propose a way to combine the competing multiple inventory objectives, i.e. meeting demand, while eliminating excessive stock, and use the resulting cost function to identify inventory optimal parameters for forecasting models. We evaluate the proposed parametrisation against established alternatives and demonstrate its performance on real data. Furthermore, we explore the connection between forecast accuracy and inventory performance and discuss the extent to which the former is an appropriate proxy of the latter.

Keywords: forecasting, inventory management, optimisation, likelihood, simulation

Suggested Citation

Kourentzes, Nikolaos and Trapero, Juan R. and Barrow, Devon K, Optimising Forecasting Models for Inventory Planning (March 25, 2019). Lancaster University Management School Management Science Working Paper 2019:2. Available at SSRN: https://ssrn.com/abstract=3363117 or http://dx.doi.org/10.2139/ssrn.3363117

Nikolaos Kourentzes (Contact Author)

Lancaster University - Department of Management Science ( email )

United Kingdom

Juan R. Trapero

University of Castilla-La Mancha

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

Devon K Barrow

University of Birmingham - Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

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