Intermittent Demand Forecasting

4Demand Distributions

4.1 Introduction

If demand over lead time were certain, then inventory replenishment would be a straightforward task. Hypothetically, suppose we know with certainty that demand never varies and is always for two units per day. Also, we know that, whenever we place an order with our supplier, then the order will always arrive in a fixed lead time period of five days without fail. If we review stock levels continuously, and place an order for 10 units whenever stocks drop to 10 units exactly, then we will be able to satisfy all customer demand while we are waiting for the order to arrive.

Of course, things are never so straightforward in real life. Firstly, the lead time may not be fixed but may vary according to the situation at the supplying company. Shortage of labour, equipment, or materials, unexpected transportation problems, or simply poor management may result in the supplier failing to meet the promised lead time. Secondly, even if the supplier does keep to the promised lead time, it is very unlikely that demand would be fixed. Instead, it is much more likely to vary over time and follow a demand distribution, as discussed in Chapter 3, with some periods showing higher demand than others. The reasons for this variability may be explainable. For example, it may be due to promotions or seasonal effects. Often, the reasons elude any convincing explanation.

In summary, we may need to address variability in lead time as well as variability in demand. ...