Inventory Management

Suppose that at a gas station, the daily demand for regular gasoline is normally distributed with a mean of 1,000 gallons and a standard deviation of 100 gallons. The station manager has just opened the station for business and notes that there is exactly 1,100 gallons of regular gasoline in storage. The manager needs help with the following:

• Issue 1: The next delivery is scheduled for later today at the close of business. The manager would like to know the probability that he will have enough regular gasoline to satisfy today’s demands.
• Issue 2: The owner wants to know how much stock he must maintain if he wants to meet demand at least 95% of the time.

Note that we have used the term "normal distribution" to describe the demand for gasoline; perhaps you have heard the term before. What does the term normal distribution mean?

Normal distribution is one of the most important probability distributions in decision-making. Many continuous variables in everyday business (e.g., age, height, income, demand, IQ, time taken to answer a customer call, etc.) follow this distribution. In the following material, we will learn about the properties of normal distribution and how that helps in decision-making.