Demand distribution in inventory management

Report, 2010

Different views on which standard demand distribution to choose when calculating safety stocks as well as on the importance of making an appropriate choice have been put forward in the literature. The purpose of this paper is to contribute to the clarifica-tion of these issues and to provide guidelines for the practitioner. Six of the most commonly published and used distributions have been analyzed and compared. The results from the research show that the performance of a standard demand distribution is not just a consequence of the mean demand, the standard deviation of demand and its shape. It is also depending on which type of service level definition that is used and how high the target service level is. The results from the research also indicate, that the differences in performance between the various standard demand distributions measured as to what extent target service levels can be achieved are almost insignificant when taking into consideration all other inaccuracies and uncertainties present in inventory management. Considering the simplicity with which calculations can be carried out when the normal distribution is used and the vast experience of using it that exists, the normal distribution is concluded to be recommended in general. Exceptions may be relevant in cases with very lumpy demand.