The Effect of the Demand Distribution in Inventory Models Combining Holding, Stockout and Re-Order Costs
F. G. Foster, J. V. Rosenhead, V. Siskind
Journal of the Royal Statistical Society: Series B (Statistical Methodology) · 1971 · Volume 33 · Issue 2
DOI: 10.1111/j.2517-6161.1971.tb00883.x
Abstract
The well-known square-root formula of inventory theory is based on the assumption of known, constant demand. When demand is probabilistic, the values of inventory control variables which minimize the expected total costs will depend on the shape of the distribution. In this paper we consider the effect of several demand distributions on a re-order cycle inventory system; however, the method of analysis is standard and could be applied to a number of other models. Formulae for the iterative calculation of optimal values of control variables are derived, and illustrated by worked examples. In the process, some results in distribution theory are developed.
Keywords
reorder cycle inventory model, holding stockout and re-order costs, effect of demand distribution, optimal stock level, square root formula
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