Microsoft® Office Excel® 2007: Data Analysis and Business Modeling, Second Edition

Chapter 68. Inventory Modeling with Uncertain Demand

• 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 67, we used the economic order quantity (EOQ) to determine an optimal order quantity and production batch size. We assumed that demand occurred at a constant rate. Thus, if annual demand occurred at a rate of, for example, 1200 units per year, then 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. When demand is uncertain, a natural question is how ...