The more the demand is divided into smaller and smaller segments, the harder it is to predict. Once there is more product variety, demand is going to become variable as well. Thus, statistical indicators such as mean and standard deviation are needed to cope with the so-called variability of demand. If demand streams are combined, the standard deviation of the combined demand goes up slower than the standard deviation of the previously uncombined demands. Such an aggregation of demand is called demand pooling and is an important method for reducing statistical uncertainty. Reductions in uncertainty can also be achieved through variance reduction or stock building.
|These lecture notes were taken during 2013 installment of the MOOC “An Introduction to Operations Management” taught by Prof. Dr. Christian Terwiesch of the Wharton Business School of the University of Pennsylvania at Coursera.org.|