You sell a product for which monthly demand is Poisson with a mean of 400. The units cost you $1,500 each, and you sell them for $2,800. You can carry inventory from month to month, and estimate your inventory holding cost as $10 per unit left in inventory at the end of a month.
Every time you order, there is a fixed cost of $600, plus the $1,500 per unit cost of the products ordered.
You want to simulate a 24-month period, at the outset of which you have 700 units in stock. For every unit in stock at the end of this period, you assess a "salvage" credit of $1,500.
You are considering ordering policies of the following form: if the ending inventory for a given month is less than or equal to some "threshold" value R, immediately order another Q units. For simplicity, assume that these units become available immediately at the beginning of the next month.
Your boss asks you to evaluate the following possible combinations of R and Q. Which one seems to yield the highest expected profit over the 24 month period?
For each policy, you also wish to estimate the probability of having a "stockout" at some time during the 24 month period. A "stockout" means that there is insufficient stock to meet customer demand.