Optimal policies for inventory systems with priority demand classes

Optimal policies for inventory systems with priority demand classes

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Article ID: iaor20073205
Country: United States
Volume: 51
Issue: 6
Start Page Number: 993
End Page Number: 1002
Publication Date: Nov 2003
Journal: Operations Research
Authors: , ,
Keywords: supply & supply chains
Abstract:

We consider a periodic review inventory system with two priority demand classes, one deterministic and the other stochastic. The deterministic demand must be met immediately in each period. However, the units of stochastic demand that are not satisfied during the period when demand occurs are treated as lost sales. At each decision epoch, one has to decide not only whether an order should be placed and how much to order, but also how much demand to fill from the stochastic source. The firm has the option to ration inventory to the stochastic source (i.e., not satisfy all customer demand even though there is inventory in the system). We first characterize the structure of the optimal policy. We show that, in general, the optimal order quantity and rationing policy are state dependent and do not have a simple structure. We then propose a simple policy, called (s, k, S) policy, where s and S (ordering policy) determine when and how much to order, while k (rationing policy) specifies how much of the stochastic demand to satisfy. We report the results of a numerical study, which shows that this simple policy works extremely well and is very easy to compute.

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