Question

Normal (or Gaussian) distributions are widely used in practice because many sets of observations follow a bell-shaped curve. In statistics, the normal distribution is one of the main assumptions in statistical inferences, such as confidence intervals and hypothesis tests.

After conducting some basic searches using scholarly articles, explain how normal distributions are used in business analytics. Your findings must include:

1. The problem background
2. Why a normal distribution is used
3. How is a normal distribution used?
4. What are the results?

Answer 1

Problem Background: Inventory forecasting is one of the areas where businesses use normal distribution in order to accurately forecast the demand for their products and services. Accurate inventory forecasting is critical in order to ensure inventory shortages do not occur when the demand kicks in, nor do businesses stock up excessive inventory, which gives rise to the risk of wastage or inventory running redundant over time. In either case, businesses might face significant losses.

Why is Normal Distribution used: Normal distribution is used for inventory forecasting as apart from the normal demand scenario of products/services, it also models the extreme cases of excessively high/low demands in its tail regions.

How is it used: Normal Distribution is used for inventory forecasting, by deriving the mean sales using historical data, and standard deviation using the fluctuations in periodic sales historically. These two parameters, mean and standard deviation, are sufficient to determine the normal distribution for the product/service.

Results: The result is that businesses are able to predict average as well as extreme case demands of their products/services more accurately, rather than through guesses or rough opinions of a few experts. Also, by adjusting the model using changing demands over time (i.e.re-calculating mean and standard deviation when demand patterns shift significantly), the model retains its relevance.