We examine a model for a retailer who wishes to set order
quantities in an inventory system with deterministic demand and
randomsupplydisruptions.(Weusetheterm “retailer” through-
out, though of course the model applies equally well to other types
of firms.) Aside from the disruptions,the system is identical to the
classical EOQ system (Harris, 1913). The durations of the supplier's
“wet” and “dry” (operational and disrupted)periods are exponen-tially distributed.Orders cannot be placed during dry periods,and
demands occurring during dry periods are lost if the retailer does
not have sufficient inventory to meet them.We refer to this
problem as the economic order quantity with disruptions (EOQD).
The EOQDwas first introduced by Parlar and Berkin(1991), whose
model was shown by Berk and Arreola-Risa (1994) to be incorrect.
Although Berk and Arreola-Risa's corrected model can be optimized numerically using efficient line-search techniques,it cannot
be solved in closed form,as ours can.