Calculating can-order policies for the joint replenishment problem by the compensation approach

Calculating can-order policies for the joint replenishment problem by the compensation approach

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Article ID: iaor20031754
Country: Netherlands
Volume: 141
Issue: 3
Start Page Number: 587
End Page Number: 595
Publication Date: Sep 2002
Journal: European Journal of Operational Research
Authors:
Keywords: programming: markov decision
Abstract:

In this paper we consider the stochastic joint replenishment problem. We coordinate the replenishment of an inventory with several items, where the fixed cost of a replenishment consists of a major order cost for each order and a minor order cost for each item participating in the order. The literature has focused on two kinds of policies: can-order policies and periodic replenishment policies. Generally speaking the can-order policy performs better when the major ordering cost is relatively low, and the periodic replenishment policies better when the major ordering cost is relatively high. We present a new method for calculating can-order policies, which dominates existing methods on examples where the can-order policy performs better than the periodic replenishment policies. The method is based on a compensation approach, where an item placing an order receives a compensation from other items benefitting from the order opportunity.

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