• The optimal values of 𝑦 ∗ and 𝑅∗ cannot be determined in closed form.

• We use an iterative algorithm developed by Hadley and Whitin that is given below.
• We want to start with a lower bound for 𝑦 ∗ .
• From (1), smaller 𝑆 leads to smaller 𝑦 ∗ .
• So, setting 𝑆 = 0 will give the initial solution.

Step 2. Use 𝑅𝑖 to determine 𝑦𝑖+1 from Equation (1).

… until convergence.
• Numerical schemes generally have good convergence performance for convex
function minimization.
• We can check that the present cost function is indeed a convex function.
• The middle term is obviously convex because ℎ𝑦/2 is convex in 𝑦, ℎ𝑅 is convex in 𝑅
and – ℎ𝐸(𝑥) is a constant.

• The first term f y = 𝐷𝐾/𝑦 can be shown to be convex in 𝑦 by showing that it

satisfies the Jensen’s inequality.
Jensen’s Inequality
• The last term must be shown to be convex jointly in 𝑦 and 𝑅.
• From convex analysis theory, this requires us to show that the Hessian matrix is
positive semi-definite.
• From linear algebra, this reduces to showing that the diagonal elements of Hessian
matrix are non-negative and that its determinant is also non-negative.

• Assume 𝑦 > 0.
• Assume that 𝑓(𝑥) is differentiable and non-increasing for 𝑥 ≥ 𝛼 meaning 𝑓 ′ (𝑥) ≤ 0
• Note that the diagonal elements are non-negative.
• So now we compute the determinant of the Hessian matrix.

• The integral is clearly non-negative, and we already assumed that 𝑓 ′ (𝑥) ≤ 0, so

𝑑𝐺 Τ𝑑𝑅 ≤ 0 implying 𝐺 is non-increasing.
• But since G ∞ = 0, this means that G(R) ≥ 0 for all R ≥ 𝛼 and so is the determinant.
 (𝒔 − 𝟏, 𝒔) Model with Poisson Demands
• This continuous review inventory policy implies that an order is placed
immediately whenever a demand occurs for one or more units of an item.

• The order quantity matches the size of the demand exactly.

• This is a valid policy when dealing with items whose cost is very high and
demand is very low.

• Inventory performance under this policy is determined entirely by a single

decision: the spare stock 𝑠 provided as protection against stockouts.