The Optimal Choice of the Smoothing Constant in an Inventory Control System

In controlling stock it is necessary to make some estimate of future demand for each stock item. Exponential smoothing is a convenient and automatic means of making such an estimate and the optimal choice of the smoothing constant alpha will depend upon the order of smoothing employed, the relative magnitudes of the random and systematic variations in demand which may occur, the replenishment lead time and also the manner in which the rule used for generating replenishment orders is formulated. The dependence both of optimal alpha and of the necessary safety stock upon these factors has been investigated by means of a model which is believed to be of wide application in industry, and a method has been developed for setting up decision rules for both single and multi-stage systems.