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When is it Feasible to Model Low Discrete Demand by a Normal Distribution?

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Author

  • Sven Axsäter

Summary, in English

Inventory control systems used in practice are quite often modeling the lead-time demand by a normal distribution. This may result in considerable errors when the real demand is low and discrete. For such demand, it is usually better to use a discrete demand distribution. However, this will increase the computational effort. A natural question is under what circumstances a normal approximation is feasible. This paper analyzes this question in a numerical study. Our study indicates that a normal approximation works reasonably well when the average lead-time demand is something like 10 or higher and the coefficient of variation is bounded by something like 2. The normal approximation works better for a high backorder cost or, equivalently, a high service level.

Publishing year

2011

Language

English

Publication/Series

OR Spectrum: Quantitative Approaches in Management

Document type

Journal article

Publisher

Springer

Topic

  • Transport Systems and Logistics

Keywords

  • Inventory management
  • Stochastic
  • Low demand
  • Normal approximation

Status

Published

ISBN/ISSN/Other

  • ISSN: 1436-6304