Advantage of make-to-stock strategy based on linear mixed-effect model: a comparison with regression, autoregressive, times series, and exponential smoothing models

Abstract

Abstract. In the past few decades, demand forecasting has become relatively difficult due to rapid changes in the global environment. This research illustrates the use of the make-to-stock (MTS) production strategy in order to explain how forecasting plays an essential role in business management. The linear mixed-effect (LME) model has been extensively developed and is widely applied in various fields. However, no study has used the LME model for business forecasting. We suggest that the LME model be used as a tool for prediction and to overcome environment complexity. The data analysis is based on real data in an international display company, where the company needs accurate demand forecasting before adopting a MTS strategy. The forecasting result from the LME model is compared to the commonly used approaches, including the regression model, autoregressive model, times series model, and exponential smoothing model, with the results revealing that prediction performance provided by the LME model is more stable than using the other methods. Furthermore, product types in the data are regarded as a random effect in the LME model, hence demands of all types can be predicted simultaneously using a single LME model. However, some approaches require splitting the data into different type categories, and then predicting the type demand by establishing a model for each type. This feature also demonstrates the practicability of the LME model in real business operations.