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Lowering Inventory Systems Costs by Using Regression‐Derived Estimators of Demand Variability *
Author(s) -
Jacobs Raymond A.,
Wagner Harvey M.
Publication year - 1989
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1989.tb01567.x
Subject(s) - estimator , variance (accounting) , statistics , econometrics , regression analysis , regression , variance inflation factor , relation (database) , linear regression , computer science , mathematics , economics , data mining , accounting , multicollinearity
Scientific techniques for inventory management typically are applied to systems containing many items. Such techniques require an estimation of the demand variance (and mean) of each item from historical data. This research demonstrates a significant potential for improvement in system cost performance from using least‐squares regression fits of a variance‐to‐mean functional relation instead of the standard statistical variance estimate. Even when there is a moderate degree of heterogeneity among items and when the form of the variance‐to‐mean relation is misspecified, substantial cost savings may be realized. The cost of statistical uncertainty may be reduced by half. The research also provides evidence that system cost is fairly insensitive to the number of items used to fit the regression. This paper provides the underlying reason why a regression‐derived variance estimator yields lower cost: it is less variable than the usual individual item variance estimator.