Optimal forecast biasing in theoretical inventory models

Abstract

Recent findings in production research have demonstrated that bias in forecasts may improve system performance in a simulated multiple-product MRP system, and optimal planned bias can be identified for simulated single product MRP settings. This paper provides an analytical approach and theoretical evidence that optimal planned bias exists to minimize the expected loss for the traditional EOQ model, as well as for the Newsboy model, when relaxing the assumption of known demand rate in the EOQ model and the assumption of known boundary of demand distribution in the Newsboy problem. Findings of this paper also provide a rationale for impact of forecast errors on cost behaviour, and facilitate a benchmark for comparing different findings of previous research work.

Improved forward buying of commodity materials

“…Additionally, we used a simplistic forecasting method for our simulation. However, future research might also take into account the ramifications of biased forecasts as done by Lee and Shih (1989). Having errors that were not normally distributed may alter the purchaser's view of the stochastic distribution of future commodity prices.…”