This note is concerned with the pitfalls of modelling demand as a normal random variable when the coefficient of variation is high. We show that this can lead to considerable under or overestimation of optimal base-stock levels. We propose the lognormal as an alternative model for lead time demands and show that optimal base stock levels asymptotically decrease with the standard deviation. We also present a distribution-free upper bound for optimal base-stock levels, and show that this upper bound first grows linearly with the standard deviation and then remains constant.
By: Guillermo Gallego, Kaan Katricioglu, Bala Ramachandran
Published in: RC23038 in 2002
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