Nonrobustness of the normal approximation of lead-time demand in a (Q, R) system

Abstract

For computing an optimal (Q, R) or kindred inventory policy, the current literature provides mixed signals on whether or when it is safe to approximate a nonnormal lead-time-demand ("LTD") distribution by a normal distribution. The first part of this paper examines this literature critically to justify why the issue warrants further investigations, while the second part presents reliable evidence showing that the system-cost penalty for using the normal approximation can be quite serious even when the LTD-distribution's coefficient of variation is quite low-contrary to the prevalent view of the literature. We also identify situations that will most likely lead to large system-cost penalty. Our results indicate that, given today's technology, it is worthwhile to estimate an LTD-distribution's shape more accurately and to compute optimal inventory policies using statistical distributions that more accurately reflect the LTD-distributions' actual shapes. © 2003 Wiley Periodicals, Inc.