On the (R,s,Q) inventory model when demand is modelled as a compound Bernoulli process

In this paper we present an approximation method to compute the reorder point s in an (R, s, Q) inventory model with a service level restriction. Demand is modelled as a compound Bernoulli process, i.e., with a fixed probability there is positive demand during a time unit; otherwise demand is zero. The demand size and the replenishment leadtime are random variables. It is shown that this kind of modelling is especially suitable for intermittent demand. In this paper we will adapt a method presented by Dunsmuir and Snyder such that the undershoot is not neglected. The reason for this is that for compound demand processes the undershoot has a considerable impact on the performance levels, especially when the probability that demand is zero during the leadtime is high, which is the case when demand is lumpy. Furthermore, the adapted method is used to derive an expression for the expected average physical stock. The quality of both the reorder point and the expected average physical stock, calculated with the method presented in this paper, rum out to be excellent, as has been verified by simulation.