Decision Rules for Buffer Inventories

Abstract

This paper presents the derivation of decision rules for determining the amount of each item to produce and hold in inventory in a multi-product factory. Under certain conditions the rules are good approximations to optimal minimum cost solutions. The model assumes that production is determined for all the items at the beginning of the production period. It uses as a framework a decision rule for the determination of aggregate inventory; this aggregate rule is based upon the approximation of factory cost by a quadratic cost function. A total inventory cost function, based upon the aggregation of the individual item rules, is derived.