As the standard deviation of forecast error increases,
A)expected overstock increases and expected understock increases.
B)expected overstock increases and expected understock decreases.
C)expected overstock decreases and expected understock increases.
D)expected overstock decreases and expected understock decreases.

Question

Quizplus · Accepted Answer

When the standard deviation of forecast error increases, it means that the forecasts are less accurate, and there is a higher chance of the actual demand being different from the forecasted demand. This results in an increase in both expected overstock (inventory sitting unsold due to overestimation of demand) and expected understock (lost sales and dissatisfied customers due to underestimation of demand). Therefore, the correct answer is A.

As the Standard Deviation of Forecast Error Increases