Modeling lead-time demand for lumpy demand and variable lead time

Abstract

Slow-moving items that occasionally exhibit large demand transactions are known as lumpy demand items. In modeling lumpy demand patterns, it is often assumed that the arrival of customer orders follows a Poisson process and that the order sizes are given by the geometric distribution. This gives rise to a stuttering Poisson (sP) model of lumpy demand. If lead times are constant, the result is a stuttering Poisson model of lead-time demand. Heretofore, authors such as Ward [18] and Mitchell, Rappold, and Faulkner [12] have assumed constant lead times and thus stopped at the sP model. We develop this model further by introducing the effect of lead-time variability. For illustration, we use the normal and the gamma distributions as characterizations of lead time. The resulting models of lead-time demand are referred to as the geometric Poisson normal (GPN) and the geometric Poisson gamma (GPG). For both these models, the article derives tractable expressions for calculating probabilities. Errors introduced by using the sP, constant lead-time model instead of the exact, variable lead-time model are also illustrated.