Chapter 5 Stochastic Inventory Models: Continuous Review

5.1 images Policies

In this chapter, we consider a setting similar to the economic order quantity (EOQ) model (Section 3.2) but with stochastic demand. The mean demand per year is images . The inventory position is monitored continuously, and orders may be placed at any time. There is a deterministic lead time L (images ). Unmet demands are backordered.

If the demand has a continuous distribution, then the inventory level decreases smoothly but randomly over time, with rate images , as in Figure 5.1. (Think of liquid draining out of a tank at a fluctuating rate.) This is the interpretation used in most of this chapter. Or demands may occur at discrete points in time (as customers arrive), for example, if the demand follows a Poisson process, as in Section 5.5.

Graph depicts Inventory level (solid line) and inventory position (dashed line) under (r, Q) policy.

Figure 5.1 Inventory level (solid line) and inventory position (dashed line) under policy.

We'll assume the firm follows an policy: When the inventory position reaches a certain ...

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