ESTIMATING THE DEMAND DISTRIBUTIONS OF SINGLE-PERIOD ITEMS HAVING FREQUENT STOCKOUTS

Very often, the service level of a single-period newsboy-type product is set at such a low level that: (i) stockouts occur in the majority o f the periods, and (ii) a large right-hand side of the empirical deman d distribution is never observable. This paper reports a practical app roach for estimating the periodic-demand distribution of such a produc t. The approach has three components: (i) using the non-parametric 'pr oduct limit' method to estimate the fractiles of the observable left-h and side of the empirical distribution; (ii) using a subjective approa ch and an 'extrapolation of hourly sales' approach to 'fill in' the mi ssing right-hand side of the empirical distribution; (iii) fitting the estimates obtained in the preceding two components to a Tocher curve - which can handle the diversity of shapes of a realistic demand distr ibution and is also computationally very convenient for subsequent cal culations for production/inventory decisions. The entire approach is s hown to be simpler but more powerful than existing alternatives for th e problem.