Decision Models for Inventory Management

Decision Models for Inventory Management

Decision Models for Inventory Management

Decision Models for Inventory Management

Excerpt

The models developed here deal with methods for inventory planning and control when stockkeeping involves: (1) planning and control on an item-by-item basis, (2) variable demand and/ or variable lead time, (3) either continuous review or review at fixed intervals and (4) unfulfilled demand either back ordered or lost. The decision variables of interest are the reorder point and the order quantity for each item in the set of stockkeeping units.

GRAPHIC PORTRAYAL

A basic situation of this kind is illustrated in Figure 1. Here the quantity in inventory is shown on the ordinate with time on the abscissa. As demands are made on the inventory, the quantity in stock decreases until at some time ( t1 ) the reorder point ( R ) is reached. An order for some amount ( Q ) is placed and at the expiration of some interval ( t2 - t1 ) the order arrives and stock is replenished. It will be assumed throughout this discussion that the basic objective of inventory policy in such situations is to determine R and Q so that total expected cost of maintaining an inventory to meet some demand ( D ) is minimized. Of course, in situations where all costs that bear on the decision variables are not known, some alternative criterion might have to be considered; but, in general, cost will be used whenever possible.

As to the effect of a stockout, two possibilities must be considered: first, that no demand is lost--that is, we are dealing with . . .

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