The Effect of the Covariance Factor on the Procurement Problem Variance of Net Leadtime Demand

An analysis is made of the formulae used by the Navy's Inventory Control Points in calculating the variance of Net Leadtime Demand of repairable items. A new formula is then derived, which makes use of actual calculations of covariance between regenerations and demands. The resulting variance values derived from the new formula are compared with the variance values resident on the Navy's Ships Parts Control Center data base and are shown to produce lower variances. The new formula is also compared to the option path formula to determine which formula produces the smallest variance. The comparison suggests an under-estimation of variances results when the option path with its estimate of the covariance is used. The thesis concludes with recommendations for implementation of the new formula.