We claimed that the critical fractile formula, Equation (12.8), is appropriate because the optimal Q should satisfy

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We claimed that the critical fractile formula, Equation (12.8), is appropriate because the optimal Q should satisfy cunder[1 – F(Q)] = cover F(Q), that is, the cost of understocking times the probability of under-stocking should equal the cost of overstocking times the probability of overstocking. Assume that Q satisfies this equation [which is equivalent to Equation (12.8)]. Use a probability argument to show why Q –1 and Q + 1 are both worse than Q in terms of expected cost.

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Practical Management Science

ISBN: 978-1305250901

5th edition

Authors: Wayne L. Winston, Christian Albright

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