In this paper, we propose a general probabilistic model for modeling the evolution of demand forecasts, referred to as the Martingale Model of Forecast Evolution (MMFE). We combine the MMFE with a linear programming model of production and distribution planning implemented in a rolling horizon fashion. The resulting simulation methodology is used to analyze safety stock levels for a multi-product/multi-plant production/distribution system with seasonal stochastic demand. In the context of this application we demonstrate the importance of good forecasting.
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Heath et al. (1994) studied this question.
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