CHAPTER 8 - DYNAMIC PROGRAMMING OF PURCHASES AND STOCKS UNDER CERTAINTY

Abstract

This chapter discusses dynamic programming of purchases and stocks under certainty. It presents dynamic problems in their strict meaning. The problem of purchases and stocks can be analyzed either under certainty or under uncertainty. Most firms prefer to keep to a fixed re-ordering period, such as for three months, usually sanctioned by custom. A certain time must elapse before the goods ordered are delivered; if this time interval is one month, the three-monthly orders must be placed one month before the end of each three-month period. This is why some firms, particularly in the Unites States, often use a two stores system. Each batch of raw materials purchased is divided into two parts and is stocked in separate stores. The main, or central, store holds a quantity of raw material to cover withdrawals during, like for two months. When this stock runs out, a new order is placed for a new batch of raw materials; in the meantime, the raw material is drawn from the stock in the subsidiary stores. The new supply of raw material, when delivered, is stocked first of all in the central stores to cover anticipated requirement, and the surplus quantity is allocated for storage in the subsidiary stores. The two-stores system proves helpful when withdrawals of raw materials from stock are not withdrawals evenly spread over time, particularly when the expected demand is uncertain.