The effect of lead‐time variability: The case of independent demand

Abstract We show in this study, through analysis and examples, the impact on stockouts and stockout risk if the variability of lead time in independent demand systems is ignored. In calculating safety stocks, we recommend that the compound distribution of demand during lead time, or a good approximation to it, be used. We motivate the article by a case study on lead‐time variability at the U.S. Air Force and show the impact of lead‐time variability by means of numerical examples and by marginal analysis. Having established that it is essential to consider lead‐time variability, we take advantage of theoretical developments and show how to calculate reorder points and safety stocks in some common situations. It is important to use the proper form for the compound distribution of demand during lead time. A normal approximation to it will often yield significant errors. This is because the true distribution is usually very much skewed to the right.