The classical Economic Production Quantity (EPQ) model as applied in production-inventory management assumes constant demand of a single item, often of a specific size. In this paper, an optimization method is developed for determining the EPQ of an item with varying size and stochastic demand. Adopting a Markov decision process approach, the states of a Markov chain represent possible states of demand for a given size of item. The decision of whether or not to produce additional units of a specific size of item is made using dynamic programming over a finite period planning horizon. Empirical results show the existence of an optimal state dependent economic production quantity for a specific size of item as well as the corresponding production-inventory costs.
Economic Production Quantity, Item size, stochastic demand
