Inventory Management: Forecast Based Approach vs. Standard Approach

In this paper, we provide a literature review on inventory management policies. Two approaches are distinguished: the standard inventory management approach and the advance demand information based approach. We focus on the advance demand information based approach. In particular, we study a pure single-stage and single-item inventory system where demand is given in the form of forecasts. Two forecast based inventory management policies are proposed, namely: the (rk,Q) which is a dynamic reorder point policy and the (T,Sk) which is a dynamic order-up-to policy. These policies are compared to the standard (r,Q) and (T,S) policies. We also show that in certain cases the two forecast based inventory management policies and the standard inventory management policies are equivalent. Further, a new safety parameter, called safety quantity, is introduced and compared to the classical safety stock parameter. A practical approach is proposed to compute this safety quantity