Bridging the gap between mathematical inventory theory and the construction of a workable model†—a case study

Abstract

This paper deals with the development of a mathematical model for controlling inventory in a real-life situation. The wide gap between mathematical theory and the building of an actual model is stressed, particularly the necessary, and often difficult, task of adapting known theoretical results to a specific problem. The inventory model chosen is one which approximates optimality and has been modified to accept, as input, demand forecasts from a forecasting model. The inventory-control procedure utilized is of the continuous-review trigger-point order-quantity type, where the trigger point and order quantity ‘ float’, that is, are adjusted periodically depending on the demand forecasts issued. Simulations are performed comparing the proposed inventory and forecasting models with current operating procedures to determine an estimate of the magnitude of the savings possible under the new system. Finally, discussion on how the new system can be implemented is presented.