Robust analysis of the basic economic order quantity model

Abstract

This paper considers the basic economic order quantity (EOQ) model when all parameters, such as the demand rate, the ordering cost, and the inventory holding cost, are uncertain, and furthermore, their probability information is also unknown. To address the uncertainty, we adopt a robustness-based approach. In this approach, each unknown parameter is described as a continuous value restricted to be in a prespecified interval. The objective of this paper is to build a robust inventory policy in closed-form under input data uncertainty. In order to predict the set of all possible optimal inventory scenarios when all parameters are unknown, we develop closed-form expressions that characterize the set of all possible EOQ's and corresponding minimum average costs. In addition, this paper considers a minimax approach to derive the optimal inventory policy in closed-form that minimizes the worst-error ratio.