An Aggregate Stockage Policy for EOQ Items at Base Level

by John Y. Lu, Robin B. S. Brooks

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A description of a mathematical model for determining optimal operating rules to control an inventory system comprising a large number of Economic Order Quantity (EOQ) items. The model accepts two types of information as inputs: item data, consisting of unit price, past demand, and resupply time; and system data, consisting of future base activity level, variance-to-mean ratio of demand distribution, and constraints on the average backorder rate and order frequency per year. Based on these inputs, the model computes a reorder point and order quantity for each item in the system. Constraints on the backorder rate and order frequency can be varied within the relevant range of the base operations and the corresponding minimum-cost policies derived. Alternative efficient policies can thus be presented to the base supply manager instead of a single policy, and he can choose the one most appropriate for his operating conditions. The model has been programmed in FORTRAN IV for the IBM 7044; it is readily adaptable to other computers of comparable size.

This report is part of the RAND Corporation Research memorandum series. The Research Memorandum was a product of the RAND Corporation from 1948 to 1973 that represented working papers meant to report current results of RAND research to appropriate audiences.

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