Lot Sizing Models: The Periodic Review Case

Abstract

We now turn our attention to managing inventory in a periodic review setting in which there are fixed costs incurred when placing orders. Thus we are examining the same type of problem presented in the previous chapter, but doing so now in a periodic review rather than a continuous review operational environment. As was the case in our study of continuous review systems, owing to the presence of these fixed ordering costs, it may no longer be economical to place an order in each period of the planning horizon. The fixed cost requires that the order be large enough to justify incurring this cost. This leads to a policy in which there are two critical numbers: the reorder point and the order-up-to level. This is the (s,S) policy introduced in the preceding chapter. When this policy is followed, an order is placed if and only if the inventory position at the beginning of a period is less than or equal to the reorder point. If an order is placed, then the size of the order will be such that the inventory position after placing the order will be equal to the order-up-to level. This means that the size of the order has to be at least the difference between the order-up-to level and the reorder point.