Reexamination of the order point inventory control system

Abstract

Among various uncertain factors surrounding the demand-supply chain, two factors are deemed to be very important and have frequently been considered by practitioners and researchers. These factors are the variability in both demand volume and supply lead time. Excess inventory, safety stock, is usually held to deal with these uncertainties. Safety stock for individual items is usually incorporated in different inventory control policies to formulate a decision rule for order timing and order quantity for the item. In developing inventory policies, it is commonly assumed that the mean and the variance of demand volume as well as those of supply lead time are known. However, in practice, these parameters are estimated from historical data, are subject to sampling variation, and hence are random variables. As a result, the true service level of the policy is generally less than the nominal service level. This paper develops a simple model for the continuous review order-point, order quantity (s,Q) system when the demand volume mean is considered to be a random variable. The model is simple enough to be used by practitioners.