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Sukhpreet Kaur, Lovely Professional University Unit 11: Inventory Model

Unit 11: Inventory Model Notes

CONTENTS
Objectives
Introduction
11.1 Single Period Models
11.2 Multiple Period Inventory Models

11.3 Fixed-order Quantity Modeling
11.3.1 Uncertainty in Demand and Lead Time
11.3.2 Model with Specified Service Levels

11.4 Summary

11.5 Keywords
11.6 Self Assessment
11.7 Review Questions
11.8 Further Readings

Objectives

After studying this unit, you will be able to:
Define Quantity Discounts or Price-Break Models

Explain Variable Demand and Constant Lead Time
Describe Uncertainty in Demand and Lead Time
Discuss Model with Specified Service Levels

Define Variable Demands and Lead Times
Introduction

Inventory models seek to optimize the costs associated with investing in an idle resource. There
are ‘single period’ and ‘multiple period’ inventory models. We will begin with single period
inventory models.

11.1 Single Period Models

This is a special case of periodic inventory system, as opposed to a perpetual inventory system.

Consider the problem that a florist stationed outside a 5-Star hotel has. Every morning, the
wholesaler’s truck comes to him and he has to decide how many flowers to buy. If he does not

have enough flowers in the stand, some customers will not be able to purchase flowers and the

florist will lose the profit associated with these sales. On the other hand, if he stocks too many

flowers he will not be able to sell them tomorrow as they will spoil. He will have paid for flowers

that remain unsold, adversely impacting the day’s profits.
Actually, this is a very common type of problem for all products that are perishable or have very
low shelf lives. This includes both goods as well as services. A simple way to think about this is
to consider how much risk we are willing to take for running out of inventory.
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