A solution for the intractable inventory model when both demand and lead time are stochastic

Abstract

We consider the reorder point, order quantity inventory model where the demand, D, and the lead time, L, are independently and identically distributed ( iid) random variables. This model is analytically intractable because of order crossover. However, we show how to resolve the intractability by empirical means, for example, by regression relationships produced by simulation and factorial experiments. Using a normal approximation, we show how to obtain regression equations for the optimal cost and the optimal policy parameters (here the order quantity and the safety stock factor) in terms of the problem parameters (ordering cost per order, holding cost per unit per unit time, shortage cost per unit, the standard deviation of demand, and the standard deviation of lead time).