Optimal process mean for a stochastic inventory model under service level constraint

In the literature of integrated targeting‐inventory models, it is common to assume that demand is deterministic. However, this assumption is not valid if the variation in the demand is high. In this paper, we address the targeting‐inventory problem when the demand is random and a service level is imposed on the producer. The production process under consideration may produce items that are non‐conforming which are scraped with no salvage value. The conformance to specifications is determined by lower and upper specification limits. A cost function is developed to determine the optimal process mean and production lot size. The results show that variation in demand has significant effect of optimal total cost. Hence, it is important to consider variation in demand in targeting‐inventory models.