What does "forecast accuracy" measure in inventory management?

What does "forecast accuracy" measure in inventory management?

• A. The total number of items forecasted
• B. The alignment of actual demand with projected demand
• C. The efficiency of the ordering process
• D. The average shelf life of inventory

Answer: (B)

Forecast accuracy measures how closely the actual demand for items matches the projected demand that was forecasted. This metric is crucial for effective inventory management because it directly impacts how well inventory levels are maintained in terms of not being overstocked or understocked. A high forecast accuracy indicates that a business is effectively predicting customer demand, which can lead to improved customer satisfaction, reduced carrying costs, and better cash flow management. On the other hand, poor forecast accuracy can result in excess inventory that ties up capital or stockouts that can lead to lost sales and dissatisfied customers. In the context of inventory management, it's important to understand that while the total number of items forecasted, the efficiency of the ordering process, and the average shelf life of inventory are relevant operational aspects, they do not directly measure how well predictions align with actual demand. This alignment is foundational for making informed decisions regarding inventory purchases, storage, and distribution.

Forecast accuracy measures how closely the actual demand for items matches the projected demand that was forecasted. This metric is crucial for effective inventory management because it directly impacts how well inventory levels are maintained in terms of not being overstocked or understocked. A high forecast accuracy indicates that a business is effectively predicting customer demand, which can lead to improved customer satisfaction, reduced carrying costs, and better cash flow management. On the other hand, poor forecast accuracy can result in excess inventory that ties up capital or stockouts that can lead to lost sales and dissatisfied customers.

In the context of inventory management, it's important to understand that while the total number of items forecasted, the efficiency of the ordering process, and the average shelf life of inventory are relevant operational aspects, they do not directly measure how well predictions align with actual demand. This alignment is foundational for making informed decisions regarding inventory purchases, storage, and distribution.