Find the best order policy to replenish stock levels, i.e. minimize the total cost incurred.
The (Q, R) inventory model is as follows:
- If the inventory falls below threshold R, place an order of quantity Q.
- Lead times: when an order is placed it takes some time to be delivered
- When inventory becomes zero, additional demand will cause a backlog. Backlogged demand will be fulfilled when replenishments arrive but at a cost.
Cost Contribution
- Fixed ordering cost (Fixed cost)
- Holding cost related to inventory (Holding cost)
- Penalties related to backlogs (Shortage cost)
Choose quantity Q and ordering threshold R to strike a good balance among these three costs!
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