Page 264 - DMGT501_OPERATIONS_MANAGEMENT

Operations Management

Notes distribution. For fast moving items a Normal distribution is appropriate, especially for items
with average lead-time demand higher than 10. Demand can then be measured using:
1. The average usage rate form historical data, and
2. The standard deviation of usage about the average.

Using the Normal distribution for a demand distribution can be questioned because:
1. The distribution is defined both on the positive and negative axes; and

2. It is symmetrical.
The demand may take on many shapes. While the Normal distribution could be approximately
correct in many cases, it cannot be used in computer simulation if and when negative demand is
generated, which may be generated at random. When of relevance, one should rather look for a

distribution, which is defined only for non-negative values and allows for skewness.

The Poisson distribution has been found to provide a reasonable fit when demand is very low
(only a few pieces per year). Less attention has been paid to irregular demand. This type of
demand is characterized by a high level of variability, but may be also of the intermittent type,
i.e. demand peaks follow several periods of zero or low demands. In such a situation forecasting

demand is considered difficult.
Example: Normal distribution describes many inventory situations in manufacturing;
and the negative exponential and the Poisson describe many of the wholesale and retail level
situations.
Some of the common forecasting methods used are simple exponential smoothing, and moving
average method. These methods are used to cope with the uncertainty in demand, in costs, in
lead-time and in supplied quantity.
The distribution may be normal, Poisson, negatively exponential distribution or any other form.
Therefore, a simple way in which it becomes easier to identify the distribution is to use frequency
distribution to identify the variability. To illustrate this approach, relative frequencies for demand
and lead time of a hypothetical example are shown in Figure 11.1.
Figure 11.1: Relative Frequency Distribution of Demand and Lead Times

258 LOVELY PROFESSIONAL UNIVERSITY