Assessing the Effects of using Demand Parameters Estimates in Inventory Control

E. Janssen, L.W.G. Strijbosch, R.C.M. Brekelmans

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Abstract

Inventory models need some specification of the distribution of demand in order to find the optimal order-up-to level or reorder point.This distribution is unknown in real life and there are several solutions to overcome this problem.One approach is to assume a distribution, estimate its parameters and replace the unknown demand parameters by these estimates in the theoretically correct model.Earlier research suggests that this approach will lead to underperformance, even if the true demand distribution is indeed the assumed one.This paper directs the cause of the underperformance and quantifies it in case of normally distributed demand.Furthermore the formulae for the order-up-to levels are corrected analytically where possible and otherwise by use of simulation and linear regression.Simulation shows that these corrections improve the attained performance.
Original languageEnglish
Place of PublicationTilburg
PublisherOperations research
Number of pages19
Volume2006-90
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-90

Keywords

  • Unknown Demand Parameters
  • Inventory Control
  • Normal Distribution
  • Service Level Criterion

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    Janssen, E., Strijbosch, L. W. G., & Brekelmans, R. C. M. (2006). Assessing the Effects of using Demand Parameters Estimates in Inventory Control. (CentER Discussion Paper; Vol. 2006-90). Operations research.