Adapting the newsvendor model for infinite-horizon inventory systems

We address inventory decisions in the context of the ‘reorder-point, order-quantity’ policy in infinite-horizon, stochastic lead-time demand inventory systems in which the parameters may be non-stationary. We develop a heuristic policy based on the simple economic order quantity model and the one-period newsvendor model. Using illustrative numerical examples, we demonstrate that our simple and easy-to-understand heuristic policy performs nearly as well as the optimal policy derived from complicated mathematical procedures. Our heuristic policy is simple, easy-to-implement, and flexible in that it can be easily adapted to situations when the parameters of the inventory system may change. Analytical modeling under non-stationary parameters would be extremely complex and the derivation of closed form optimal policies is mathematically intractable in most cases. In such cases, practitioners will find our heuristic policy an attractive option.