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When is it feasible to model low discrete demand by a normal distribution?

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Abstract

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.

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Authors and Affiliations

  1. Department of Industrial Management and Logistics, Lund University, P. O. Box 118, 221 00, Lund, Sweden

    Sven Axsäter

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  1. Sven Axsäter
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Correspondence to Sven Axsäter.

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Axsäter, S. When is it feasible to model low discrete demand by a normal distribution?. OR Spectrum 35, 153–162 (2013). https://doi.org/10.1007/s00291-011-0278-8

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