Bayesian Determination of the Reorder Point of a Slow Moving Item

Consider an inventory item for which the procurement (or production setup) lead time is nonzero. One of the commonly used methods of determining the reorder point of such an item is to specify the probability of a stockout or a desired service level (fraction of demand that is to be instantaneously satisfied) and then select the reorder level that will provide such service. However, such an approach has assumed that the probability distribution of demand during the lead time is exactly known. In many inventory situations this assumption is not justified, particularly in the case of a slow moving item with limited available sales history. For such a situation this paper explores the use of a Bayesian approach to selecting a reorder point.