The Effect of the Demand Distribution in Inventory Models Combining Holding, Stockout and Re-Order Costs

Abstract

Summary 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.