Insurance type item provisioning guidelines

Policy decisions for insurance type items, where zero or one unit is maintained at the depot, are more difficult and more critical than decisions for common supply items. This report presents results of developing initial provisioning guidelines for insurance type items. The guidelines are based on examination of lifetime costs and benefits. Costs of stocking an item as compared with not stocking are developed through a sinking fund annual payment formulation. Benefits of stocking are developed as stationary reduction in time weighted backorders experienced. A resource allocation formulation yields an optimal policy for allocating a fixed budget. The guideline is presented with refinements based on a sample of items. A figure of merit is calculated for each item, and if it is large the item is stocked while if small it is not stocked. Empirical definitions for large and small are developed based on sample data. Estimation techniques are discussed for deriving all of an item's parameters needed to compute its figure of merit. A Bayes procedure is suggested based on family group Experienced Demand Replacement Factors. This and other techniques are discussed.