Reorder Point, Lot Size Models: The Continuous Review Case
When there is a significant fixed cost incurred when placing an order with a supplier, it is no longer beneficial to order each time a demand occurs. In Chapter 2 we examined the impact of fixed costs on ordering quantities when the demand processes were known with certainty. Now we will study situations in which significant fixed ordering costs are incurred and the demand process is assumed to be a stationary stochastic process. Furthermore, we will assume a transaction reporting system exists. That is, we assume that we monitor the inventory levels continuously through time, and place an order for a quantity of stock, called the lot size, at a point in time so as to minimize the average annual cost of operations.
We will confine our attention to developing models for controlling inventories at a single location. To begin, we will also limit attention to managing a single item. Later, we will examine models in which we consider the interactions of many items on stocking decisions.
KeywordsLead Time Demand Process Customer Order Exact Model Laplace Distribution
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