PROBABILISTIC MODELS OF

INVENTORY MANAGEMENT FOR

INSTANTANEOUS DEMAND
Submitted by : Mohit Kumar Mishra (20MTS5718)
Rishikesh Barela (20MTS5725)
Submitted to: Kiran Garg
College: Deen Dayal Upadhaya College
Course: BSc Mathematical Science
There are two types of models for instantaneous
demands :-

 With Discrete Stock levels

With Continuous Stock levels

 MODEL A(With Discrete Stock levels)
In this model, we have
 instantaneous demand
 setup cost zero
discrete stock levels
lead time zero
This model deals with inventory situation that require one time purchase only.
E.g. flowers, cosmetics or seasonal items or spare parts.
Item is ordered at the beginning of the period to meet demand during that period.
Demand is instantaneous as well as discrete in nature.
At the end, there are two types of costs involved:-
1. over-stocking costs
2. Under-stocking costs
• Let,
R = discrete demand rate with probability ,
= discrete stock level for time interval t,
t = constant interval between orders,
= over-stocking cost
=c+ -v
= under-stocking cost
= S – c – /2 +

Where C is the unit cost, is the unit carrying cost, the shortage cost, S the unit
selling price and V is the salvage value.
Then the optimal order quantity is determined when value of cumulative probability distribution exceeds the
ratio / (+ by computing.

< / (+ <
Question: A trader stocks a particular seasonal product at the beginning of
the season and cannot reorder. The item costs him ₹25 and he sells it at ₹50
each. For any item that cannot be met on demand, the trader has estimated a
goodwill cost of ₹ 15 . Any item unsold will have a salvage value of ₹ 10 .
Holding cost during the period is estimated to be 10% of the price. The
probability of demand is as follows:

units stocked : 2 3 4 5 6
probability of demand : 0.35 0.25 0.20 0.15 0.05

Determine the optimal number of items to be stocked.

Hence, =4 units .
 MODEL B(With Continuous Stock levels)
In this model, all conditions are same as in model A except that the stock
levels are continuous(rather than discrete).
 Therefore, probability f(R) dR will be used instead of , where f(R) is the
probability density function of the demand rate R.
Then the optimal order quantity is determined when the value of cumulative
probability distribution is equal to / (+ by computing.
THANK YOU