INTRODUCTION

Inventory modelling and models deals with defining the degree of a commodity that a
business must maintain to ensure smooth operations (Taha, 2008). It involves mathematical
equations and formula that generally helps a firm minimize costs and the frequency of ordering
to keep goods or services flowing to the customer without interruption or delay. It answers the
companys questions on (1) when to reorder stock, and (2) how much stock to order (Shah,200).
Basis for decision is a model that balances the cost of capital resulting from holding too much
inventory (holding cost) against the penalty cost resulting from inventory shortage.
The goal of an inventory model therefore is to define an inventory policy. The inventory
policy would then answer the questions of when to restock and by how much. The policy focuses
on minimizing company costs such as the purchasing costs, SetUp cost, Holding cost and
Shortage cost. One way of determining inventory policy is through an Economic Order Quantity
(EOQ) model. An EOQ model is used to calculate the optimal quantity that can be purchased
produced to minimize the cost of both the carrying inventory and processing of purchase orders
(Hax, 1984).
The simplicity, intricacy and approach of an inventory model depend on whether the
demand for an item is deterministic or probabilistic. In this study we focus on an inventory
policy that is of probabilistic in demand. It differs from other EOQ models (i.e. Deterministic
EOQ) mainly by the nature of its demand, its relation with the change in time, and its complexity
to solve.
Most inventory models consider that demand rate is constant. However, most of the real
world scenarios work with constantly changing demand. Rather than introducing an

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approximation to superimpose a constant buffer stock in a Probabilitized Deterministic EOQ
model, Probabilistic EOQ models is used as a more accurate model for presenting the
probabilistic nature of the demand. This model allows shortages of demand and answers how
much to order whenever the inventory drops to a certain point. The SetUp Model (s-S Policy) is
a single period Probabilistic EOQ technique in which an item is ordered only once with the
condition that there is an incurring setup cost. It results in an inventory policy that evaluates
whether it will be costly, economical or indeed a need to create an order.
In this study, probabilistic inventory modelling approach was applied to the data acquired
from Davao del Norte Milk Processing Plant (DNMPP). The company process fresh cows milk
to produce milk bar and bottled milk with several flavours. It was established through the help of
the provincial officials in order to provide opportunity to cow growers. Basically the companys
target markets are students and some Non-governmental organizations (NGO) that aid
malnourished children.
DNMPP produces a certain amount of one-litre milk bottles which commonly last for
around one week, and are distributed through network vendors. In this study, an optimal policy is
determined given that the demand is probabilistic and the products are perishable. In this case, an
economic order quantity (EOQ) is used. The company would then for determine how much to
order considering its probabilistic demand and the assumption used in an s-S policy model.
Specifically this paper aimed to:
1. identify the distribution of the DNMPP data;
2. identify the appropriate EOQ model for the data; and
3. recommend an optimal ordering policy for the company.

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This paper utilized the data of DNMPP covering the periods March 15, 2013 to March 5,
2014. The study focuses on finding out a recommendable ordering policy for DNMPP. Such goal
is valuable for the company since failure to comply to such inventory policy could suggest lack
of production, then failure to create profit and later on could lead to shutting down of the
operation.