Safety Stock and Forecast Error

Nick T. Thomopoulos, Ph.D.

IIT Stuart Graduate School of Business

Illinois Institute of Technology

IM 13

Abstract

This paper shows how the need for safety stock increases when the forecast error increases – and conversely --  how the need for safety stock decreases when the forecast error decreases. 

A way to measure the change in safety stock with forecast error changes is presented. 

The paper also shows how much safety stock is needed relative to the total inventory – here called the total stock.  

The results of this paper brings forth the obvious need to use a sound statistical forecasting system to run the inventory operation. 

In essence, the smaller the forecast error, the less need for safety stock, the less inventory and the higher inventory profit margin..