A Mathematical Model for Deciding Optimal Ordering Policy for Fixed Lifetime Inventories with Expected Insurance Costs

Managing inventory-related risks is crucial for companies dealing with fixed lifetime inventories. Previous researches have focused on the study of inventory management and risk management. However, there are no adequate study in the literature that combines these two critical aspects in the mamagement of fixed liftetime inventories. We developed a stochastic optimization problem and minimized the expected total costs. The aim of the study is to examine decisions as regards when to place order or not for the probabilistic fixed lifetime inventory model with expected insurance costs. We computed the expected ordering costs, expected holding costs, expected shortage costs, expected outdate costs and expected insurance costs. These expected costs were applied to obtain the expected total costs for the inventory system. We also determined the optimal ordering policy for the probabilistic fixed lifetime inventory model with expected insurance cost. A numerical application demonstrates the effectiveness of the proposed model in reducing the expected total costs. The results highlight the usefulness of integrating insurance costs into inventory management for fixed lifetime inventory products.