ABSTRACT
In the preceding two chapters, which dealt with the determination of replenishment quantities, the decision rules resulted from analyses that assumed deterministic demand patterns. In several places, we showed that the relevant costs associated with the selection of order quantities were relatively insensitive to inaccuracies in the estimates of the various factors involved. However, the costs of insufficient capacity in the short run-that is, the costs associated with shortages or with averting them-were not included in the analyses. When demand is no longer assumed to be deterministic, these costs assume a much greater importance. Clearly, the assumption of deterministic demand is inappropriate in many production and distribution situations. Therefore, this chapter is devoted to the theme of how to develop control systems to cope with the more realistic case of probabilistic demand. We initially restrict our attention to the case (comparable to Chapter 4) where the average demand remains approximately constant with time. We address the more difficult setting of timevarying probabilistic demand in Chapter 7.
