Consider an EOQ model under continuous review withfixed
ordering costK, holding cost hper unit per year, and constant,
deterministic demand rateDunits per year. (Without loss of
generality we assume that the time unit is one year.) Suppose
that the supplier is not perfectly reliable—that it functions nor-mally for a certain duration (called a“wet period”) and then shuts
down for a certain duration (a“dry period”). During dry periods,
no orders can be placed, and if the retailer runs out of inventory
during a dry period, all demands observed until the beginning of
the next wet period are lost, with a stockout cost ofpper lost sale.
The durations of both wet and dry periods are exponentially
distributed, with ratesλandμ, respectively. Every order placed
by the retailer is for the same quantity,Q, orders are only placed
when the inventory level reaches 0, and orders placed during wet
periods are received immediately (there is no lead time). The goal
of the model is to choose Q to minimize the expected annual cost.
We refer to this problem as the economic order quantity with
disruptions(EOQD)