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: | Duenyas Izak, Zhang Rachel Q., Frank Katia C. |
Keywords: | supply & supply chains |
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 (