A periodic review inventory model with emergency orders using Bayesian demand estimation

In this paper, we consider a periodic review inventory model, with the option of placing regular orders at review time points, and emergency orders in continuous time. Demand uncertainty is modeled by considering the mean demand to be a random variable, and the resulting demand distribution is estimated using the Bayesian approach. The optimal inventory policy for regular as well as emergency ordering, is evaluated. A profit comparison is done to observe the improvement in profit by placing emergency orders. Also, a sensitivity analysis of the estimated model is performed to test the sensitivity of the optimal solution to the demand estimation.