Intermittent Demand Forecasting. John E. Boylan

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      All three periodic review systems discussed in this chapter are possible candidates for implementation with intermittent demand items. Arguably, there are some disadvantages associated with the and policies, but the evidence is not conclusive. systems seem to be appropriate for intermittent demand. Although they may not be universally recommended for application, they are very appealing both in practical and theoretical terms. If the review interval has been determined, then there is only one parameter to optimise (). This simplifies calculations and enables a more focused discussion about optimisation and the integration of forecasting into inventory calculations, than dealing with two parameters (which would be the case for and policies).

      The periodic order‐up‐to level system will be used for the remainder of this book. However, before we close this section some variations of this system should be discussed. This follows in Section 2.5.4.

      2.5.4 Variations of the Periodic Policy

      The can be viewed as a periodic implementation of the policy or as a special case of the policy for . The latter is an example of an policy, which may be operated under continuous or periodic review.

Schultz (1987) discussed a periodic policy for the control of intermittent demand items. At the end of every review interval, the inventory position is checked against the base stock level . If the inventory position is less than or equal to , an order is calculated to bring the inventory position up to ; otherwise, no order is needed. The policy's normal mode of operation is to place a replenishment order at the time the order is calculated, i.e. at the end of the review interval. Alternatively, a replenishment delay (of several periods) may be introduced with the aim of reducing inventory holding costs, if only minor increases in the cost of stockouts is expected. This modification was shown theoretically to offer considerable cost benefits (i.e. inventory holding cost savings that outweigh the increased cost of a stockout condition).

      Schultz's proposition covers the inventory system against the possibility that one demand will occur during the lead time plus review interval. Necessary assumptions in this model's implementation are the following: (i) lead times are small, as compared to the average inter‐demand interval and (ii) the cost of reordering is small relative to the cost of holding sufficient inventory to meet more than one order.

      The first assumption is clearly very restrictive. However, some work has been conducted to exploit the fact that the lead time (plus review interval) may indeed sometimes be less than the average inter‐demand interval. Syntetos et al. (2009a) developed a modified policy that was shown empirically to perform very well for such cases. The database used for experimentation contained demand histories and lead times for 5000 SKUs from the Royal Air Force. About 50% of the sample met the qualifying condition for inclusion in the experiment (i.e. that the lead time plus review interval is less than the average inter‐demand interval) showing that models exploiting this information may be very useful in practice. However, the fact remains that they cannot be used for all intermittent demand SKUs and we do not consider them further in this book.

      2.5.5 Summary

      From a practitioner's standpoint, robust and not overly complicated inventory control models are required for intermittent demand items. In this section, we first provided an overview of stock control policies, arguing for the consideration of periodic (as opposed to continuous) formulations for the management of intermittent demand items. Not all such policies are easy to implement and some of them are based on very restrictive assumptions. We view the policies as being consistent with practical needs and we further consider their implementation in later chapters.

2.6 Chapter Summary

      Intermittent demand items dominate the stock bases in many industries, and in their capacity as service parts constitute a major opportunity for financial gains in the after‐sales market. In this book, we treat service parts as independent demand items and discuss estimating their future requirements and appropriately replenishing their inventories.

      Owing to their inherent slow movement, an important decision relates to whether intermittent demand items should be kept in stock at all. Simple rules that rely upon a forecast of the mean demand may be employed to reach such decisions.

Assuming that an item is stocked, an appropriate policy is needed to decide when to replenish its inventory and by how much. We have argued for the relevance of periodic stock control policies, including the use of the periodic policy (also known as the order‐up‐to (OUT) level rule) to manage intermittent demand items. The operation of this policy depends on the service measure employed and the distribution of demand, to be discussed in detail in the next three chapters. We return to the question of forecasting in Chapters 6 and 7.

Technical Notes

      Note 2.1 Order Overplanning

      Bartezzaghi and Verganti (1995) (see also the work by Verganti 1997; Bartezzaghi et al. 1999)

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