The discounted (R,Q) inventory model-The Shrewd Accountant's Heuristic

The discounted continuous-review (R,Q) inventory model with continuous and stochastic demand is investigated. New optimality conditions are derived, clarifying the difference to the average-cost case, also graphically. Supported by depreciation theory, applied to the value of a setup, the results suggest an insightful and very precise approximation - The Shrewd Accountant's Heuristic - based on a new average-cost model. It deepens and extends the work of Hadley (1964). Three examples are worked out in detail and the model is generalized to Poisson demand and to stochastic lead-times.