CHOOSING ORDER QUANTITY (SIZE—PROBLEM)

The objective of inventory decisions is usually to minimize total inventory costs to the company. Costs are ascribed to all elements which are of interest in reaching its inventory decisions (e.g. purchasing costs, stock out costs etc.), and solutions, are derived based on these costs.

Several inventory planning models exist. These models can be classified into two basic classified into two basic classifications:

(1) Deterministic Models:—whereby all parameters are known with certainty, e.g. lead-time, annual demand, and so on.

(2) Stochastic Models:—in which parameters (particularly demand and lead time) are not known with certainty, but follow known probability distributions (i.e. risks).