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Assumptions
Demand occurs continuously over time
Times between consecutive orders are stochastic but
independent and identically distributed (i.i.d.)
Inventory is reviewed continuously
Supply leadtime is a fixed constant L
There is no fixed cost associated with placing an order
Orders that cannot be fulfilled immediately from onhand inventory are backordered
Notation
I: inventory level, a random variable
B: number of backorders, a random variable
X: Leadtime demand (inventory on-order), a random variable
IP: inventory position
E[I]: Expected inventory level
E[B]: Expected backorder level
E[X]: Expected leadtime demand
E[D]: average demand per unit time (demand rate)
IP = I+X - B = R
Leadtime Demand
Under a base-stock policy, the leadtime demand X
is independent of R and depends only on L and D
with E[X]= E[D]L (the textbook refers to this
quantity as ).
The distribution of X depends on the distribution
of D.
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Objective
Choose a value for R that minimizes the sum
of expected inventory holding cost and
expected backorder cost, Y(R)= hE[I] +
bE[B], where h is the unit holding cost per
unit time and b is the backorder cost per unit
per unit time.
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12
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Y ( R 1) - Y ( R ) h R 1 E[ D ]L ( h b) x R 1 ( x R 1) Pr( X x )
h R E [ D ]L (h b) x R ( x R ) Pr( X x )
h (h b) x R 1 ( x R 1) ( x R ) Pr( X x )
h ( h b) x R 1 Pr( X x )
h ( h b) Pr( X R 1)
h ( h b) 1 Pr( X R )
b (h b) Pr( X R )
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Y ( R 1) - Y ( R ) 0
b ( h b) Pr( X R ) 0
b
Pr( X R )
bh
Example 1
Demand arrives one unit at a time according to a
Poisson process with mean . If D(t) denotes the
amount of demand that arrives in the interval of time
of length t, then
( t ) x e t
Pr( D ( t ) x )
, x 0.
x!
L
)
e
also
have
the
Poisson
Pr( X x )
, distribution
E[ X ] L, with
and Var ( X ) L.
x!
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Y ( R*) ( h b) Var ( X ) ( zb /( b h ) )
Y ( R*) ( h b) L ( zb /( b h ) )
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Example
2
If X has the geometric distribution with parameter , 0
1
P ( X x ) x (1 ).
E[ X ]
1
Pr( X x ) x
Pr( X x ) 1 x 1
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Example 2 (Continued)
The optimal base-stock level is the smallest integer
R* that satisfies
Pr( X R * )
1
R* 1
b
bh
R*
bh
b
]
b h 1
ln[ ]
ln[
b
ln[
]
bh
ln[ ]
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Computing Expected
Backorders
It is sometimes easier to first compute (for a given
R
R),
E [ I ] x 0 ( R x ) Pr( X x )
and then obtain E[B]=E[I] + E[X] R.
For the case where leadtime demand has the
Poisson distribution (with mean = E(D)L), the
following relationship (for a fixed R) applies
E[B]= Pr(X=R)+(-R)[1-Pr(X R)]
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