What is a good probability distribution to model fluctuating demand?  Is the Normal distribution applicable?  How can you estimate a probability distribution when history is unreliable?

Understanding demand variability is key to setting an inventory strategy.  Demand variability directly affects the safety stock calculation.  Demand variability and shelf life interact to affect production frequency, thus affecting cycle stock.  An accurate model of demand variability is essential, especially if you have products with limited shelf life that will lose value if demand is less than expected.

This is the second in a series of blogs on the topic of lot sizing to determine optimal batch quantity for production or ordering in uncertain times.  The first blog in this series covered the traditional methodology for Economic Lot Size (ELS).   Upcoming blogs will show how to integrate traditional ELS with the demand distribution covered in this blog and how to estimate a demand distribution when history is unreliable.