An alternative approach for modeling multi-item inventory problems

In almost all the inventory models in the literature, the optimal policy is obtained by trading off the cost of ordering with the cost of holding inventory. These models assume that the ordering cost is variable with number of orders made. However, in many situations in practice, the ordering cost is a step function. In this paper, we present an alternative approach to model multi-item inventory problems. Instead of the conventional approach of including ordering costs in the objective function, certain restrictions are imposed on the number of orders. These restrictions are based on the availability of resources for making the orders. The objective then is to develop policies that minimize the average inventory holding cost. The problem is formulated as a non-linear program and a simple algorithm is presented to solve it. Sensitivity analysis can also be easily performed, when there are changes in the ordering restrictions.