The impact of distributions of uncertain lumpy demand on inventories

Abstract

Most studies on inventory management under demand uncertainty analyse the detrimental effects of demand variability (i.e. its coefficient of variation). In contrast, the consequences of the shape of demand distribution (e.g. its multi-modality and asymmetry) have received only minor attention. The aim of the present paper is to assess the impact of the shape of demand distribution on inventories. In particular, it considers contexts in which demand distributions have more than one 'mode' and are asymmetric, thus making requirements lumpy. The analysis is based on a simulation model which, in order to ensure comparable conditions, keeps all the other factors constant (i.e. ceteris paribus), and compares different demand distributions with the same mean and coefficient of variation. Results show that that demand shape is a key driver of inventory investment. Specifically: (i) the magnitude of the impact of multi-modality and asymmetry is comparable to that of variability; (ii) multi-modality and asymmetry can have either a negative or positive effect depending on the target service level sought. The managerial implications of these findings are addressed in the conclusions.