What is the optimal of inventory optimization of the following case

Question

What is the optimal of inventory optimization (one inventory in serial system) when considering fixed ordering cost, and (holding/units)cost and (shortage/units)cost

Answer 1

There are several optimization strategies. the 's,S' orderstrategy is the one that can be seen as optimal. This strategy means that there is an order point 's' and when inventory reaches this point, one orders up to an amount 'S'. Determining s and S are pretty difficult and exhaustive in computation. There are numerical methods that can be used, but an algebraic expression isn't present.

A good approximation where we don't deviate more than 1% in total cost is determining 's' as the simple calculation of a re-order point (demand durling lead time + safety stock) and 'S' as this re-orderpoint plus the EOQ (economic order quantity).

I don't know your level of knowledge, but the EOQ and the safety stock also require some computations, as it is a trade-off of costs and some other mathematical manipulations. A good resource book is the following:

https://www.amazon.com/Inventory-Management-Production-Planning-Scheduling/dp/0471119474

This post describes the calculation of the safety stock

Derivation of the Safety Stock Formula on Wikipedia

Steven