Managing Inventory in the Presence of Lead Time and Demand Correlation

Prior research has investigated the appropriate ordering policy for an inventory system. Two key factors to are daily demand and lead time. Many studies assume lead time and daily demand are independent. In this study, we relax this assumption for a continuous review inventory system and analyze the characteristics of the optimal ordering policy. We present the difference between the uncorrelated and correlated cases. We show that considering correlated demand and lead time complicates matters considerably but leads to more generalized and robust recommendations. More specifically, we demonstrate how the correlation between demand and lead time impacts the relationship between total inventory cost, and demand and lead time uncertainties. Contrary to some of what the former literature suggests, a higher demand uncertainty can generate a lower total cost for an inventory system when demand and lead time are correlated