By Martin K. Starr and David W. Miller
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Extra info for Inventory control: theory and practice
Therefore, we can use exactly the same argument as before to justify the calculation, and use, of expected values. In this case we will be calculating expected opportunity costs. The only difference will be that since these are costs the merchant will want to select that strategy which will minimize his expected opportunity cost rather than maximizing as he did for expected profits. The calculations of expected 28 static inventory problems under risk / chap. 2 Of course, it is not a coincidence.
The outcome depends strictly on what level of demand eventuates. 75 profit each season if he always ordered four trees. Now that we have formulated, and resolved, this inventory decision problem, let us compare what we have done with our general comments con- cerning the approach to inventory problems. We talked previously of opposing costs, of the necessity of considering the total costs which are equal to the sum of the various opposing costs, and of the minimization of the total costs. When we review our present example it appears that the only cor- respondence there is with this suggested scheme is that we did, in fact, minimize something.
In Part 2 of this book we will have occasion to discuss some of the simpler methods which seem particularly apt for inventory problems. In the next chapter we will discuss more extensively some of the difficulties involved and suggest a possible compromise solution which will not require the detailed information about the probability distribution of demand which we are assuming here. For the purposes of this chapter we will be satisfied to discover the analysis which should be followed if we do have the necessary information about demand.