Chapter 5

Inventory Control
Subject to Uncertain
Demand
Timing Decisions
Quantity decisions made together with decision
When to order?
One of the major decisions in management of the inventory systems.

Impacts: inventory levels, inventory costs, level of service provided

Models:
One time decisions
Continuous review systems
Periodic review systems
Timing Decisions
Intermittent-Time
Decisions
Continuous Decisions
One-Time
Decisions
Continuous Review
System
Periodic Review
Systems
EOQ, EPQ
(Q, R) System
Base Stock
Two Bins
(s, S) System
Optional
Replenishment
(S, T) System
EOQ
Structure of timing decisions
One-Time Decision
Situation is common to retail and manufacturing environment

Consider seasonal goods, which are in demand during short period only.

Product losses its value at the end of the season. The lead time can be
longer than the selling season if demand is higher than the original
order, can not rush order for additional products.

Example
newspaper stand
Christmas ornament retailer
Christmas tree
finished good inventory

Trivial problem if demand is known (deterministic case), in practical
situations demand is described as random variable (stochastic case).
newsvendor model
or
Christmas tree model
Example: One-Time Decision
Mrs. Kandell has been in the Christmas tree business for
years. She keeps track of sales volume each year and has
made a table of the demand for the Christmas trees and its
probability (frequency histogram).
Demand,
D
Probability
f(D)
22 0.05
24 0.10
26 0.15
28 0.20
30 0.20
32 0.15
34 0.10
36 0.05
Solution:
Q order quantity; Q
*
- optimal
D demand: random variable with
probability density function f(D)
F(D) cumulative probability function:
F(D) = Pr (demand D)
c
o
cost per unit of positive inventory
c
u
cost per unit of unsatisfied demand

Economics marginal analysis:
overage and underage costs are balanced
Probability of not selling
Your Last item in stock and
having extra inventory on hand
at the end on the period
P(X < Q)
The Concept of Marginal Analysis
Probability of
Selling everything,
and facing shortage
P(X Q)

Q
Marginal analysis:
finding the expected profit of ordering one more unit.
Critical ratio for the newsvendor problem
0 2 4 6 8 10 12 14
Newspaper demand, X
P
r
o
b
a
b
i
l
i
t
y
P(X<Q)
(C
o
applies)
P(X>Q)
(C
u
applies)
Single Period Inventory Model Marginal Analysis:

E (revenue on last sale) = E (loss on last sale)
Example: One-Time Decision (cont)
Shortages = lost profit + lost of goodwill
Overage = unit cost + cost of disposal of the overage
Either ignore the purchase cost, because it does not impact the optimal
solution or implicitly consider it in the overage and underage costs.
Expected overage cost of the order Q
*
is
P(Demand <Q*) c
o
=F(Q
*
)c
o
Expected shortage cost is
P(Demand >Q*) c
u
=(1-F(Q*)) c
u
For order Q
*
those two costs are equal: F(Q
*
)c
o
= (1-F(Q
*
))c
u

- probability of satisfying demand during
the period, also is known as critical ratio
To calculate Q
*
we must use cumulative probability distribution.
( ) ( )
o u
u
c c
c
Q F Q D P
+
= = <
- -
Example: One-Time Decision (cont.)
Deman
d
D
Probability
f(D)
Cum
Probability
F(D)
22 0.05 0.05
24 0.10 0.15
26 0.15 0.30
28 0.20 0.50
30 0.20 0.70
32 0.15 0.85
34 0.10 0.95
36 0.05 1.00
Mrs. Kandell estimates that
if she buys more trees than
she can sell, it costs about
$40 for the tree and its
disposal. If demand is
higher than the number of
trees she orders, she looses
a profit of $40 per tree.
( ) 50 . 0
40 40
40
=
+
=
+
=
-
o u
u
c c
c
Q F
28 =
-
Q
Critical fractile for the newsvendor problem
When the demand is a discrete random
variable, the condition

may not be satisfied at equality (jumps,
due to discreteness). Heres the
appropriate condition to use:


C(Q+1)-C(Q)=(c
u
+ c
o
)P
Xs
(Q) c
u
0

} ) ( : min{
*
o u
u
X
c c
c
Q P Q Q
+
> =
s
o u
u
c c
c
Q F
+
=
) (
Single-Period & Discrete Demand: Lively Lobsters
Lively Lobsters (L.L.) receives a supply of fresh, live
lobsters from Maine every day. Lively earns a profit of
$7.50 for every lobster sold, but a day-old lobster is
worth only $8.50. Each lobster costs L.L. $14.50

unit cost of a L.L. stockout
C
u
= 7.50 = lost profit
unit cost of having a left-over lobster
C
o
= 14.50 - 8.50 = cost salvage value = 6
target L.L. service level
CR = C
u
/(C
u
+ C
o
) = 7.5 / (7.5 + 6) = .56

Demand follows a discrete (relative frequency)
distribution as given on next page
Lively Lobsters
Demand follows a
discrete (relative
frequency)
distribution:

Result:

order 25 Lobsters,
because that is the
smallest amount
that will serve at
least 56% of the
demand on a
given night.
Probability that demand
Demand
Relative
Frequency
(pmf)
Cumulative
Relative
Frequency
(cdf)
will be less than or equal to x
19 0.05 0.05
P(D < 19 )
20 0.05 0.10
P(D < 20 )
21 0.08 0.18
P(D < 21 )
22 0.08 0.26
P(D < 22 )
23 0.13 0.39
P(D < 23 )
24 0.14 0.53
P(D < 24 )
25 0.10 0.63
P(D < 25 )
26 0.12 0.75
P(D < 26 )
27 0.10
P(D < 27 )
28 0.10
P(D < 28 )
29 0.05
P(D < 29 )
* pmf = prob. mass function
} ) ( : min{
*
o u
u
X
c c
c
Q P Q Q
+
> =
s
The Nature of Uncertainty
Suppose that we represent demand as
D = D
deterministic
+ D
random


If the random component is small compared to the deterministic
component, the models used in chapter 4 will be accurate. If not,
randomness must be explicitly accounted for in the model.

In chapter 5, assume that demand is a random variable with
cumulative probability distribution F(D) and probability density
function f(D).

D - continuous random variable, N(, )
estimated from history of demand
seems to model many demands accurately
Objective: minimize the expected costs law of large numbers
The Newsvendor Model
The critical ration can also be derived mathematically.

At the start of each day, a newsvendor must decide on the number of
papers to purchase. Daily sales cannot be predicted exactly, and are
represented by the random variable D with normal distribution
N(, ), where = 11.73 and = 4.74

It can be shown that the optimal number of papers to purchase is given
by F(Q*) = c
u
/ (c
u
+ c
o
),
where c
u
= 75 25 = 50, and c
0
= 25 10 =15
unrealized profit per unit = (selling price purchase price);
loss per excess = (purchase price disposal price);

F(Q*) = c
u
/ (c
u
+ c
o
) = 0.77 Pr ( D < Q* ) = 0.77

How to find Q* ?
Determination of the Optimal Order
Quantity for Newsvendor Example
24 . 15 = + =
-
o z Q
Using table A-4 find z = 0.74, with = 11.73 and = 4.74
Newsvendor has to
order 15 copies
every week.
Describing Demand
If Demand is deterministic (EOQ)
Inv
Time
Q=600
Order
arrives
Place
Order
Reorder
Point=300
LT=3 wk
Place
Order
Order
arrives
If Demand is stochastic
Inv
Time
Q=600
Order
arrives
Place
Order
Reorder
Point=300
LT=3 wk
Place
Order
Order
arrives
LT=3 wk
If Demand is stochastic
Inv
Time
Q=600
Order
arrives
Place
Order
Reorder
Point=400
LT=3 wk
Place
Order
Order
arrives
LT=3 wk
Average Inventory Profile
Inv
Time
Q=600
Safety Stock=100
Avg. Cycle Inv=300
Avg. Inv
=400
Terminology
On-hand stock: Stock that is physically on the shelf

Net stock = On-hand stock Backorders

Inventory Position =
On-hand + On-order - Backorders - Committed

Complete backordering: backordered demand is
filled as soon as an adequate-size replenishment
arrives

Complete lost sales: when out of stock, demand is
lost, customers go somewhere else
Why Safety Stock?
Safety Stock: Avg level of the net stock just
before a replenishment arrives

Pressure for higher safety stocks
Increased product variety and customization
Increased demand uncertainty
Increased pressure for product availability

Pressure for lower safety stocks
Short product life cycles
The ABC Inventory
Classification System
The ABC classification, devised at General Electric during the
1950s, helps a company identify a small percentage of its items that
account for a large percentage of the dollar value of annual sales.
These items are called Type A items.
Adaptation of Paretos Law
20% of the people have 80% of the wealth (in 1897 Italy)

Since most of our inventory investment is in Type A items, high
service levels will result in huge investments in safety stocks.


Tight management control of ordering procedures is essential for
Type A items.

For Type B items inventories
can be reviewed periodically
Items can be ordered in small
groups, rather than individually.

Type C items require the
minimum degree of control
Parameters are reviewed
twice a year. Demand for
Type C items may be
forecasted by simple
methods. The most
inexpensive items of type C
can be ordered in large lot, to
minimize number of orders.
An expensive type C items
ordered only as they are
demanded
The ABC Inventory Classification System
10 20 30 40 50 60 70 80 90 100
Percentage of items
P
e
r
c
e
n
t
a
g
e

o
f

d
o
l
l
a
r

v
a
l
u
e

100
90
80
70
60
50
40
30
20
10
0
Class C
Class A
Class B
Replenishment Policies
When and how much to order

Continuous review with (Q,R) policy:
Inv. is continuously monitored and when it drops
to R, an order of size Q is placed

Periodic review with (R,S) policy:
Inv. is reviewed at regular periodic intervals (R),
and an order is placed to raise the inv. to a
specified level (order-up-to level, S)
Measures of Customer Service:
(Average) Product availability measures
Fill rate (P
2
):
Percentage of demand that
is satisfied from inventory
Compute Expected Shortage
per Replenishment Cycle
(ESPRC)
P
2
= 1-ESPRC/Q

Cycle Service Level (P
1
):
Prob. of no stockout per
replenishment cycle, or
percentage of cycles without
stockouts
Safety Stock Level
0
100
200
300
400
500
600
700
800
900
97 97.5 98 98.5 99 99.5 100
P_2
S
S
SS
Comparison of Type 1 and Type 2
Services
Order Cycle Demand Stock-Outs
1 180 0
2 75 0
3 235 45
4 140 0
5 180 0
6 200 10
7 150 0
8 90 0
9 160 0
10 40 0

For a type 1 service objective there are two cycles out of ten in which
a stock-out occurs, so the type 1 service level is 80%. For type 2
service, there are a total of 1,450 units demand and 55 stockouts
(which means that 1,395 demand are satisfied). This translates to a
96% fill rate.
Continuous Review Systems
The EOQ, production lot size, and planned
shortage models assume continuous review

(Q, R) Policies
These models call for policies prescribing an order
point (R) and order quantity (Q)
Such policies can be implemented by
A point-of-sale computerized system
The two-bin system: use inventory from bin 1 until empty
which triggers reorder replenishment fills bin 2 and
remainder goes into bin 1
Order Point, Order Quantity Model (R,Q)
Inventory position constantly monitored
Inventory position used to place an order, and not the net stock

Stockout occurs if demand during lead time exceeds the reorder
point

Simple system suppliers like the predictability of constant order
quantities
R
Safety Stock (SS)
Time
Inventory Level
R + Q
Lead Time
Place
order
Receive
order
Reorder
Point , R
X
Safety Stock (SS)
Time
Inventory Level
Optimal
Order
Quantity
SS
s
Expected
Demand
P(Stockout)
Freq
Lead Time
Place
order
Receive
order
Probabilistic Models
When to Order
Uncertain Demand
Time
O
n
-
h
a
n
d

i
n
v
e
n
t
o
r
y

Order
received
Q
On
Hand
Order
placed
Order
placed
Order
received
IP
IP
R
TBO
1
TBO
2
TBO
3
L
1
L
2
L
3
Q
Order
placed
Q
Order
received
Order
received
Expected Inventory (Assumptions)
Time
I(t)
Slope
-
Q

SS

Q
T =
Expected cost function
Include expected: holding, setup, penalty and
ordering (per unit) costs
Average Holding Cost:


Average Set-up Cost:


K
T
=
K
Q


2
Q
h SS
| |
+
|
\ .
Expected cost function
Expected Shortage per Cycle:



Interpret n(R) as the expected number of stockouts per
cycle given by the loss integral formula.
The unit normal loss integral values appear in Table A-4.

Expected Penalty Cost :
) ( ) ( ) ( )) 0 , ( (max R n dx x f R x R D E
R
= =
}

( ) ( )
( )
n R n R
P P
T Q

=
Cost Minimization
c
Q
R n p
Q
K
R
Q
h R Q G

t + + + + =
) (
)
2
( ) , (
Expected Cost Function:


Partial Derivatives:
(1)



(2)

| |
h
p n(R) K
Q
Q
R n p
Q
K h
Q
G +
= => = =
c
c 2
0
) (
2
2 2
cG
cR
= h +
p
Q
' n (R)
This is the first equation
we will use to determine
optimal values Q and R
Cost Minimization

p
Qh
R F
R F R n
dx x f R x R n
R n
Q
p
h
R
G
R
=
=
'
=
'
+ =
c
c
}

) ( 1
)) ( 1 ( ) (
) ( ) ( ) ( : Note
) (
Partial Derivatives:
(2)





This is the second equation
we will use to determine
optimal values Q and R
Solution Procedure
The optimal solution procedure requires iterating
between the two equations for Q and R until
convergence occurs

A cost effective approximation is to set Q=EOQ
and find R from the second equation.
Finding Q and R, iteratively
1. Compute Q = EOQ.
2. Substitute Q in to Equation (2) and compute R.

3. Use R to compute n(R) in Equation (1).

4. Solve for Q in Equation (1).

5. Go back to Step 2, continue until convergence.
Q =
2 K + p n(R)
| |
h
n(R) = (x R) f (x)dx
R

}
1 F(R) =
Qh
p
Example
A company purchases air filters at a rate of 800 per year

$10 to place an order

Unit cost is $25 per filter

Inventory carry cost is $2/unit per year

Shortage cost is $5

Lead time is 2 weeks

Assume demand during lead time follows a uniform
distribution from 0 to 200

Find (Q,R)
Solution
| |
2 ( )
2(800)(10 5 ( ))
8000 4000 ( )
2
2
1 ( )
5(800) 2000
K p n R
n R
Q n R
h
Qh Q Q
F R
p

+
+
= = = +
= = =
Partial derivative outcomes:




Solution
From Uniform U(0,200) distribution:
R
R
R
R
R Rx
x
dx R x dx x f R x R n
a b
x f
x
R x
R R
+ =
|
|
.
|

\
|
+ =
|
|
.
|

\
|
=
= =
= =
=
=

} }
400
100

2
200
2
200
200
1

2 200
1

200
1
) ( ) ( ) ( ) (
200
1
-
1
) ( : U(0,200)
2
2
2 2
200
2
200
Solution
EOQ=
2K
h
=
2(10)(800)
2
= 8000 = 89.44 = Q
o
1 F(R
o
) =
Q
o
h
p
=
89
2000
= .04
F(R
o
) = .96
R
o
= (.96)(200 0) = 192
Iteration 1:
F(R)
200 0
R
2000
) ( 1
) R ( 4000 8000
100 R
400
R
) R (
1
2
Q
R F
n Q
n
=
+ =
+ =
Solution
Iteration 2:
190 ) 200 )( 95 (.
05 .
2000
94
) ( 1
76 . 93 ) 198 (. 4000 8000
198 . 100 192
400
(192)
) (
1
1
1
2
0
= =
= =
= + =
= + =
R
R F
Q
R n
2000
) ( 1
) R ( 4000 8000
100 R
400
R
) R (
1
2
Q
R F
n Q
n
=
+ =
+ =
Solution
Iteration 3:
190
05 .
2000
94
)) ( 1 (
228 . 94 ) 2197 (. 4000 8000
2197 . 100 190
400
190
) (
2
2
2
2
1
=
= =
= + =
= + =
R
R F
Q
R n
2000
) ( 1
) R ( 4000 8000
100 R
400
R
) R (
1
2
Q
R F
n Q
n
=
+ =
+ =
Solution
R didnt change => CONVERGENCE
(Q*,R*) = (94,190)
I(t)
Slope
-800
253
159
190
With lead time equal to 2 weeks:
SS = R t =190-800(2/52)=159
Example
Demand is Normally distributed with mean of 40 per
week and a weekly variance of 8

The ordering cost is $50

Lead time is two weeks

Shortages cost an estimated $5 per unit short to
expedite orders to appease customers

The holding cost is $0.0225 per week

Find (Q,R)
Demand is per week.
Lead time is two weeks long. Thus, during the
lead time:
Mean demand is 2(40) = 80
Variance is (2*8) = 16
Demand observed in one week is independent from
demand observed in any other week:
E(demand over 2 weeks) = E (2*demand over week 1)
= 2 E(demand in a single week) = 2 = 80

Standard deviation over 2 weeks is = (2*8)
0.5
= 4

Solution
) 2 2 , 40 ( N
Finding Q and R, iteratively
1. Compute Q = EOQ.
2. Substitute Q in to Equation (2) and compute R.

3. Use R to compute average backorder level,
n(R) to use in Equation (1).

4. Solve for Q using Equation (1).

5. Go to Step 2 until convergence.
| |
h
p n(R) K
Q
+
=
2
n(R) = (x R) f (x)dx
R

}
p
Qh
R F = ) ( 1
Solution
9527 . ) (
0473 .
) 40 ( 5
) 0225 (. 6 . 421
) ( 1
6 . 421
0225 .
) 40 )( 50 ( 2 2
=
= = =
= = = =
o
o
o
o
R F
p
h Q
R F
Q
h
K
EOQ

Iteration 1:






From the standard normal table:
( ) .9527
( 1.67) 0.9527
80 1.67(4) 86.68
o
o
F R
P z
R Z o
=
s =
= + = + =
Solution
Iteration 2:





2
0
1
2
0
( ) ( ) ( )
1
( ) ( )
2
86.68 80
4 4 (1.67)
4
4(.0197) .0788
R
x
R
n R x R f x dx
n R x R e dx
R
L L L

o
to

o
o

| |

|
\ .
=
=

| | | |
= = =
| |
\ . \ .
= =
}
}
This is the unit normal loss expression.
Table A - 4 gives values.
Solution
Iteration 2:
( ) ( )
3 . 423
0225 .
) 0788 (. 5 50 ) 40 ( 2 ) ( 2
0788 . ) (
1
0
=
+
=
+
=
=
h
R pn K
Q
R n

1 F(R
1
) =
Q
1
h
p
=
423.3(.0225)
5(40)
= .0476
F(R
1
) = .9523
R
1
= 86.68
Conv ergence!
Service Levels in (Q,R) Systems
In many circumstances, the penalty cost, p, is
difficult to estimate.
For this reason, it is common business practice to
set inventory levels to meet a specified service
objective instead.
1) Type 1 service: Choose R so that the probability of
not stocking out in the lead time is equal to a
specified value.
Appropriate when a shortage occurrence has the same
consequence independent of its time and amount.
2) Type 2 service: Choose both Q and R so that the
proportion of demands satisfied from stock equals a
specified value.
In general, | is interpreted as the fill rate.
Solution to (Q,R) Systems
with Type 1 Service Constraint
F(R) = o probability demand is satisfied
Set Q = EOQ =
2K
h
For type 1 service, if the desired service level
is then one finds R from F(R)= and
Q=EOQ
Specify o, which is the proportion of cycles in
which no stockouts occur.
This is equal to the probability that demand
is satisfied.

Solution to (Q,R) Systems
with Type 2 Service Constraint

Type 2 service requires a complex iterative solution
procedure to find the best Q and R

However, setting Q=EOQ and finding R to satisfy
n(R) = (1-)Q (which requires Table A-4) will
generally give good results
Average Stockouts per Cycle
Average Demand per Cycle
=
n(R)
T
=
n(R)
Q
n(R)
Q
= 1 |,
n(R) = 1 | ( )Q
Service Constraints: Type 2
May specify fill rate |, and use EOQ for Q to compute R
Or, solve for p :

and substitute into the equation:
( )
0
)) ( 1 (
) (
2
)) ( 1 (
) (
2
)) ( 1 (
) (
2
) ( 2
2
2
=

+ =
|
|
.
|

\
|

+
=
+
=
K Q
R F
R hn hQ
Q
R F
R hn
K
hQ
h
R F
R Qhn
K
h
R pn K
Q

1 ( )
Qh
F R
p
=
Service Constraints: Type 2
Result:






Q R n
R F
R n
h
K
R F
R n
Q
) 1 ( ) (
) ( 1
) ( 2
) ( 1
) (
2
|

=
|
|
.
|

\
|

+ +

=
Other Continuous Review System:
Order-Up-To-Level (s, S) vs (Q, R) System
R+Q
R
s
S
(Q,,R) system
(s, S) system
(Q,R) system
(s,S) system
R
R + Q
s
S
Periodic Review System:
Order-Up-To-Level (R, S) System
Periodic Review Systems
Continuous Review Systems
Always knew level of on-hand inventory
Could place an order at any time

Often, we are constrained by WHEN we can order --
and it may be periodically
Train dispatched once a week
Delivery truck arrives each morning

Thus, we do not need to continuously review
inventory, just check periodically

Periodic Review Systems
If demand were known and constant, we would just
resort to our EOQ solution, possibly modifying it to
meet shipping date
Now: demand is random variable
Setting:
Place an order every T periods
Policy: Order up to S
The value of Q (order quantity) will now change periodically
Previous concern: demand exceeding supply during the
lead time
Now: demand exceeding supply during the period and
lead time, or T + t
Periodic Review
Time
I(t)
Demand
S
t
Q
T
t
Lead Time passes
Order up to S
every T periods of
time.
Order arrives.
Cycle continues.
Expected cost function
Include expected holding, setup,
penalty and ordering (per unit) costs
Average Inventory Level:





S
T

R*
At level R*,on average,
order Q = S-R* units.
periods later, units arrive.
Inventory level?
Expected cost function
Include expected: holding, setup,
penalty and ordering (per unit) costs
Average Inventory Level:





S
T
S-t units present when
Q arrive (expected) as
t units consumed over
leading time.
Expected cost function
Include expected: holding, setup,
penalty and ordering (per unit) costs
Average Inventory Level:





S
T
S - t
T units removed
(expected) from
inventory over
time T.
Include expected: holding, setup,
penalty and ordering (per unit) costs
Average Inventory Level:





S
T
S-t
T
S-t-T
Average Inventory Level = ( )
2 2
T
S
T
T S

t

t = +
Expected cost function
Include expected:

holding, setup, penalty and ordering (per unit) costs

Average Holding Cost:



Average Set-up Cost:
K
T

h S t
T
2
|
\
|
.
Expected cost function
Expected cost function
Expected Shortage per Cycle:
f(x)dx = P(demand in T + t is between x and x + dx)




Expected Penalty Cost :

max ( ( ( ) , 0))
( ) ( ) ( )
S
E T S
x S f x dx n S
t

+
= =
}
p
n(S)
T
Cost Minimization
Expected Cost Function:



Derivative:
Recall that T and t are given:


) (S n
T
p
h
dS
dG
'
+ =
G(S,T) = h(S t
T
2
) +
K
T
+
pn(S)
T
+ c
Cost Minimization
p
hT
S F
S F S n
dx x f S x S n
S n
T
p
h
dS
dG
S
=
=
'
=
=
'
+ =
}

) ( 1
)) ( 1 ( ) (
) ( ) ( ) ( : Note
0 ) (
Derivative:








or:
F(S) =
p hT
p
Example
A special control board is used in a version of a
product on the production line
The board cost is $122.50
The holding cost rate is 30% per year
Reorders are placed at the start of each week,
and the supplier delivers these parts in one week
The shortage cost is $100 per board due to
worker downtime
Weekly demand is N (=125,
2
=104.17)
Set up cost (K) is $120
Find S
Solution
Holding cost is:
h = Ic = .30 (122.50) = 36.75 / 52 = $.7067 per week
Compute:



Demand Distribution is Normal
mean = 125 variance = 104.17
Z = 2.455 from Normal table


S = 125+(2.455)(104.17)
1/2
= 150.06
F(S) =
p hT
p
=
100 (.7067)1
100
= 0.993
o z S + =
Solution
If penalty cost drops to $10 per unit:
Compute:



S = 125+(1.47)(104.17)
1/2
= 140
p = 1? S = 125+(-.54)(104.17)
1/2
=
119.49
F(S) =
p hT
p
=
10 (.7067)1
10
= 0.929
Alternative Periodic Review Policy:
(s, S) Policy
Define two levels, s < S, and let u be the starting inventory at the
beginning of a period.

Then, if u is less or equal to s, order (S u),
if u is more than s, do not place an order.

In general, computing the optimal values of s and S is extremely
difficult, so few systems operate using optimal (s,S) values.

Approximation:

Compute optimal values for (Q,R) model and set
s = R and S = R + Q
Homework Assignment
Read Ch. 5 (5.1 5.8)
5.3, 5.6 5.8, 5.12, 5.15, 5.19
5.25 5.27
References
Presentations by McGraw-Hill/Irwin and by Wilson,G.R.

Production & Operations Analysis by S.Nahmias

Factory Physics by W.J.Hopp, M.L.Spearman

Inventory Management and Production Planning and
Scheduling by E.A. Silver, D.F. Pyke, R. Peterson

Production Planning, Control, and Integration by D. Sipper
and R.L. Bulfin Jr.