Stochastic Inventory Management in a Shortage

Read this article. The study indicates that a stochastic inventory management system should be preceded by determining the economic feasibility of the shortage. How does using real-time statistics help determine purchasing?


  1. The algorithmic procedure of finding the parameters of the stochastic inventory management system, which provides the calculation of economically expedient shortage level, the optimal amount of safety stock, connected with customer service level is developed, by the criterion of the total costs. Shortage costs and correlation with the storage cost set by the scenario approach determine the most expedient shortage level in the real conditions of creation and storage of inventory.
  2. The advisability of calculating the parameters of the inventory management system with a normal distribution of demand and delivery time on the basis of economically justified shortage level is justified. Thus, exactly the estimated shortage level should determine the optimal service level, not vice versa. In fact, the ratio, which determines the optimal shortage level, takes into account all components of the system costs, and, therefore, finds the shortage level according to the criterion of total costs, which include in particular the costs of the insufficient service level.
  3. Based on the found compromise between shortage level, safety stock, and client service level, the parameters of the stochastic inventory management system – optimal order quantity, reorder point and the threshold level of stocks, which consider the level of the economically reasonable shortage and the optimal safety stock were calculated. This approach allows forecasting the status of the stock and reacting promptly to any changes in consumer demand or goods delivery terms.