A Refinement of the Classical Order Point Model

Factors such as demand volume and replenishment lead time that influence production and inventory control systems are random variables. Existing inventory models incorporate the parameters (e.g., mean and standard deviation) of these statistical quantities to formulate inventory policies. In practice, only sample estimates of these parameters are available. The estimates are subject to sampling variation and hence are random variables. Whereas the effect of sampling variability on estimates of parameters are in general well known in statistics literature, literature on inventory control policies has largely ignored the potential effect of sampling variation on the validity of the inventory models. This paper investigates the theoretical effect of sampling variability and develops theoretically sound inventory models that can be effectively used in different inventory policies.