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Economical reorder quantities and reorder points with uncertain demand

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  • Lawrence L. Parker

Abstract

The problem of determining reorder quantities and reorder points that minimize the total costs of carrying inventory, placing orders, and penalties for back orders, in the face of uncertain demand, is considered in this paper. By making approximations to the total cost function and the safety factor versus service function relationship, an economic order quantity is derived that depends on the uncertainty in the foiecast of demand during the lead time, but is independent of the back order cost. Reorder points are then determined for the case in which the back order cost is explicitly stated, and for the case in which the back order cost is unknown and the desired customer service is used as the controlling parameter. Simulations indicate that, when compared with use of the Wilson economic order quantity, the use of the formulae derived in this paper will lead to approximately a 5‐7‐percent reduction in the total cost.

Suggested Citation

  • Lawrence L. Parker, 1964. "Economical reorder quantities and reorder points with uncertain demand," Naval Research Logistics Quarterly, John Wiley & Sons, vol. 11(3‐4), pages 351-358, September.
    • Handle: RePEc:wly:navlog:v:11:y:1964:i:3-4:p:351-358
    DOI: 10.1002/nav.3800110308
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    Cited by:

    1. Wang, Tai-Yue & Hu, Jui-Ming, 2008. "An inventory control system for products with optional components under service level and budget constraints," European Journal of Operational Research, Elsevier, vol. 189(1), pages 41-58, August.
    2. Ghalebsaz-Jeddi, Babak & Shultes, Bruce C. & Haji, Rasoul, 2004. "A multi-product continuous review inventory system with stochastic demand, backorders, and a budget constraint," European Journal of Operational Research, Elsevier, vol. 158(2), pages 456-469, October.

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