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DETERMINISTIC AND PROBABILISTIC INVENTORY MODEL. What is Operations Research? Before: Application of mathematics and the scientific method to military operations Today: Scientific approach to decision making. Seeks to determine best way to design and operate system, usually requiring allocation of scarce resources OR Methodology Inventory Model Inventory refers to idle goods or materials that are held by an organization for use sometime in future. Example. • Raw materials • Purchased parts • Components • Subassemblies • Work-in-process • Finished goods Key issues: 1. What are possible costs? * Order cost. There is a fixed cost when an order is placed. * Holding cost. It represents the costs of carrying inventory in stock (e.g. interest on invested capital, storage, handling, depreciation, and maintenance) * Purchasing cost. A discount or price break when the order quantity reaches certain level. * Shortage cost. It is a penalty when stock is run out (e.g. lost of customers goodwill and potential loss of income). 2. How much should be ordered when the inventory is replenished? * This is about order quantity. The idea...

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