A practical near-optimal order quantity method

Inventory controllers prefer to set the order quantities and safety stocks directly, using a known rule or formula, rather than rely on a computer iterative method. Formulae such as the Economic Order Quantity, EOQ, allow direct calculation, but are frequently far from optimal. The purpose of this research was to find simple near-optimal formulae for the order quantity and safety stocks, which can be used by inventory controllers. This paper presents a method of deriving a closed form solution of the total cost function. This gives a simple formula for Q, which can be calculated directly. It replaces the need to compute an EOQ or use ad hoc procedures. The formula is simple enough to be calculated on a hand-calculator, although it is being implemented on an existing computerised inventory system. It appeals to inventory controllers and management because they can obtain an order quantity (or order cycle) and reorder level directly. Because they can understand it, they trust it more than ad hoc procedures. In addition, the formula saves considerably on computer time. The approach can be applied to service definitions, lead time demand distributions and inventory systems other than those assumed here.