Chapter 77. Inventory Modeling with Uncertain Demand

Questions answered in this chapter:

  • At what inventory level should I place an order if my goal is to minimize annual holding, ordering, and shortage costs?

  • What does the term 95-percent service level mean?

In Chapter 76, I showed how to use the economic order quantity (EOQ) to determine an optimal order quantity and production batch size. The examples assumed that demand occurred at a constant rate. Thus, if annual demand occurred at a rate of, for example, 1,200 units per year, monthly demand would equal 100 units. As long as demand occurs at a relatively constant rate, the EOQ is a good approximation of the cost-minimizing order quantity.

In reality, demand during any time period is uncertain. ...

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