Assessing the Effects of Using Demand Parameters Estimates in Inventory Control

CentER Discussion Paper No. 2006-90

18 Pages Posted: 10 Oct 2006

See all articles by Elleke Janssen

Elleke Janssen

Tilburg University - Center for Economic Research (CentER)

L.W.G. Strijbosch

Tilburg University, CentER

R.C.M. Brekelmans

Tilburg University - Tilburg University School of Economics and Management

Date Written: September 2006

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.

Keywords: Unknown Demand Parameters, Inventory Control, Normal Distribution, Service Level Criterion

JEL Classification: C13, C53

Suggested Citation

Janssen, Elleke and Strijbosch, L.W.G. and Brekelmans, R.C.M., Assessing the Effects of Using Demand Parameters Estimates in Inventory Control (September 2006). CentER Discussion Paper No. 2006-90, Available at SSRN: https://ssrn.com/abstract=936332 or http://dx.doi.org/10.2139/ssrn.936332

Elleke Janssen (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

L.W.G. Strijbosch

Tilburg University, CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 3233 (Phone)

R.C.M. Brekelmans

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
B 1029
5000 LE Tilburg
Netherlands
+31 13 466 8234 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
133
Abstract Views
886
Rank
387,988
PlumX Metrics