Inventory rationing and shipment flexibility alternatives for direct market firms

This paper investigates inventory-rationing policies of interest to firms operating in a direct market channel. We model a single product with two demand classes, where one class requests a lower order fulfilment lead time but pays a higher price. Demand for each class follows a Poisson process. Inventory is fed by production system with exponentially distributed build times. We study rationing policies in which the firm either blocks or backlogs orders for the lower priority customers when inventory drops below a certain level. We compare the performance of these rationing policies with a pure first-come, first-serve policy under various scenarios for customer response to delay: lost sales, backlog, and a combination of lost sales and backlog.