S12 · decision value simulation

What is an 8% lower forecast error worth to a parts warehouse?

People, data and outputs in this scenario are simulated. Each stage is recorded when you commit; the reveal comes after.

5stages
35 minabout
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The brief

An aircraft maintenance organisation (simulated) stocks 1,200 spare-part SKUs. Replenishment orders use a demand forecast over the supplier lead time, plus safety stock set to hit a 95% cycle service level. The data team (simulated) reports: "On 12 monthly backtest origins, the new model reduced RMSE by 8% against the current method (range across origins 3% to 13%). Approve 150,000 to build it; running cost is 40,000 a year."

Every figure below is hypothetical. Safety stock currently averages 120 units per SKU at an average unit cost of 60; annual holding cost is 20% of inventory value.

Stage 1 of 5

The operations director (simulated): "RMSE is your metric, not mine. What is eight percent of RMSE in money?"

How do you translate the metric?

It cannot be converted: RMSE is a technical measure, and the business value has to be judged qualitatively by the people who run the warehouse.It lowers total inventory cost by 8%, since better forecasts let us reduce every kind of stock we hold, including cycle stock and obsolete items.Safety stock scales with forecast-error spread at a fixed service level, so about 8% of safety-stock holding cost; cycle stock does not change.