13 Inventory Models

Inventories buffer supply against demand: raw materials waiting for production, goods waiting for customers, spare parts waiting for breakdowns. Holding them costs money (capital, storage, spoilage), and so does ordering them (set-up, paperwork, transport) and running out of them (lost sales, idle plant, goodwill). Inventory theory finds how much to order and when, trading these costs against each other. This section starts with Harris’s economic order quantity (1913), the oldest model in OR, and moves to random demand: the single-period newsvendor problem and the \((s, S)\) policies that are optimal for periodic review.

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