Numerical computation of inventory policies, based on the EOQ/σx value for order-point systems

This paper examines the numerical computation of two control parameters, order size and order point in the well-known inventory control model, an (s, Q) system with a beta safety stock strategy. The aim of the paper is to show that the EOQ/sigma (x) value is both sufficient for controlling the system and essential for the economic consequences of using approximations in computations of optimal policies. In view of the evidence from a number of studies showing that firms' use of statistical inventory control lags far behind academic interest in the area, this is also an important aspect. The determination of optimal values for the control variables - even in this very simple inventory control system - is a complex task, and therefore not suited to practical implementation, where one or more of the following issues are neglected: the interdependence of order size and order point, the difference between stock on hand and net stock, and the excess stockout included in the next period. We use the determination of optimal values for the control variables as a framework to evaluate the economic consequences of these approximations, applied in pratical inventory control. (C) 2001 Elsevier Science B.V. All rights reserved.