The R,Q Model:

Review and
Discussion
Christian Hofer, Ph.D.

Review: The R,Q Inventory

Model
Purpose: Define inventory control
parameters R and Q such that
logistics performance is
maximized
Procedure: Two options
Optimization: Find costminimizing R, Q through
optimization
Managerial: Define desired
type 1 SL (~ R), compute Q
(EOQ)

Christian Hofer, Ph.D.

Sam M. Walton College of Business

How the OPTIMAL R,Q Model

Works
Input Values
Optimal Parameters
Logistics Performance

h
K

SS

Christian Hofer, Ph.D.

Sam M. Walton College of Business

G(Q,R)

N(R)

Optimal R,Q Policy:

The Questions We Ask
1

How should the control parameters

change as input values change?

How will changes in input values affect

logistics performance?

What can we do to improve logistics

performance?
Christian Hofer, Ph.D.
Sam M. Walton College of Business

Scenario 1: Price Increase

Our sole supplier has just
raised prices for all SKUs
by 30%.

Christian Hofer, Ph.D.

Sam M. Walton College of Business

Scenario 2: Order cost

reduction
Our company and its
suppliers have established a
new EDI (electronic data
interchange) system which
effectively reduces order
placement costs by 50%.
Christian Hofer, Ph.D.
Sam M. Walton College of Business

Scenario 3: Increased
Variability
Consumer demand
uncertainty has doubled
during these times of
economic stagnation/
recession.
Christian Hofer, Ph.D.
Sam M. Walton College of Business

Scenario 4: Increased
Backorder Cost
An aggressive competitor has
entered the market. As a result,
backorders have to be
processed more quickly to avoid
losing customers, increasing
backorder costs by 50%.
Christian Hofer, Ph.D.
Sam M. Walton College of Business

Scenario 5: Longer Lead Times

Frequent customs processing
delays have resulted in
increased lead times and lead
time variability (+50%,
respectively)? How does this
affect sales and total costs?
Christian Hofer, Ph.D.
Sam M. Walton College of Business

What can we do to
improve
logistics performance?
Cost reduction
Managing uncertainty
will discuss soon

Christian Hofer, Ph.D.

Sam M. Walton College of Business

How the MANAGERIAL R,Q

Model
Works
Input Values
Control Parameters
Logistics Performance

G(Q,R)

K
h

SS

p
Christian Hofer, Ph.D.
Sam M. Walton College of Business

N(R)

Managerial R,Q Policy:

The Questions We Ask
Can we do better (and why
dont we)?
If we can do better, how much
could we gain?
Christian Hofer, Ph.D.
Sam M. Walton College of Business

Scenario 6: Large Order

Quantity
The CFO wants us to reduce
(cycle) inventory and
associated costs by reducing
replenishment quantities.

Christian Hofer, Ph.D.

Sam M. Walton College of Business

Scenario 7: Low Safety Stocks

Management has cut
inventories to improve our
cash position. But our safety
stock levels were not all that
high to begin with.
Christian Hofer, Ph.D.
Sam M. Walton College of Business