A Random Walk Production-Inventory Policy: Rationale and Implementation

Daniel Orr
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Daniel Orr: University of Chicago, Chicago, Illinois

Management Science, 1962, vol. 9, issue 1, 108-122

Abstract: The smoothing of fluctuations in production and inventory has been handled successfully as a problem in servomechanisms: an optimal linear filter (production scheduling policy) balances costs of inventory fluctuation and costs of production fluctuation. This approach requires the system to respond (by making production rate changes) either continuously or at regular intervals: the usual assumption is that the cost of responding is proportional to the size of the response. This paper explores some reasons why the frequency of production changes may have to be controlled, and offers a new class of policies, called random walk policies, to accomplish this. One of these, the (a, b, c) policy, is investigated for stationary operating characteristics, and a specific example is provided to illustrate the technique of finding optimal values for policy parameters. Some of the characteristics of systems in which random walk inventory policies may be useful are discussed; and more general techniques for identifying the form of the optimal control policy are mentioned.

Date: 1962
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