A comparison of maximum likelihood, exponential smoothing and Bayes forecasting procedures in inventory modelling

This paper compares four major schemes used for forecasting mean demand to be used as input into an inventory model so that ‘ optimum ’ stockage levels can be obtained. The inventory model is the classical order up to S, infinite horizon model with carry-over from period to period and complete back-ordering. Maximum likelihood, exponential smoothing, standard Bayes and adaptive Bayes schemes are used and results, via Monte Carlo simulation, are obtained on the average costs per period for (1) stationary demand, (2) long-term trend and (3) ‘ shock ’ changes in mean demand.