Lead-Time Demand Modeling in Continuous Review Supply Chain Models

Abstract

This paper introduces a mixture distribution approach to modeling the probability density function for lead-time demand (LTD) in problems where a continuous review inventory system is implemented. The method differs from the typical moment-matching approach by focusing on building up an accurate, closed-form approximation to the LTD distribution from its components by using mixtures of truncated exponential (MTE) functions. First, construction of the LTD is illustrated and the approach is compared to two other possible LTDs. This distribution is then utilized to determine optimal order policies in cases where a buyer makes its decisions alone, and later in a situation where members of a two-level supply chain coordinate their actions.