Justifying New Technology Acquisition Through its Impact on the Cost of Running an Inventory Policy

Abstract

This paper presents a model for justification of new technology acquisition derived from its effect on the inventory setup costs. Recently, Porteus [10] considered a situation where investment in the new technology (Just-in-Time) is evaluated on the basis of its impact on reducing the setup costs in the EOQ model. This paper extends the Porteus work to the situation where demand during lead time is probabilistic. In this case, the justification of new technology acquisition is made on the basis of its impact on reducing the setup costs in the lot-size reorder-point, (Q,r), model. Explicit solutions are obtained for two specific demand distributions and two general cost functions. The paper also compares the proposed model with that of Porteus and presents a qualitative observation for situations where the application of EOQ and (Q),r systems will result in significant differences in the decision to acquire new technology.