THE (S-1,S) INVENTORY POLICY UNDER COMPOUND POISSON DEMAND: A THEORY OF RECOVERABLE ITEM STOCKAGE,

Abstract : This memorandum derives the simple analytic solution to the special, but important inventory problem in which the optimal policy is to reorder a unit whenever one is demanded. The demand distribution can be any compound Poisson; the resupply distribution is arbitrary. Both the backorder case and the lost sales case are solved by generalizing a queueing theorem due to Palm. The procedure is to calculate by item the steady state probabilities for the number of units in resupply (or repair). These probabilities completely describe the item's long term behavior, and are simply the normalized values of the compound Poisson demand distribution based on the mean of the resupply distribution but not on the distribution itself. Knowledge of these state probabilities enables us to compute several measures of item supply performance as a function of the spare stock, s. Traditional inventory analysis can then be applied to minimize total cost based on estimates of holding cost and supply performance cost. The appendices contain a description of the algorithm and the computer program for calculating stuttering Poisson state probabilities and the measures of effectiveness for the backorder case. Numerical illustrations are also provided. (Author)