A heuristic for triggering emergency orders in an inventory system

A heuristic for triggering emergency orders in an inventory system

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Article ID: iaor20084247
Country: Netherlands
Volume: 176
Issue: 2
Start Page Number: 880
End Page Number: 891
Publication Date: Jan 2007
Journal: European Journal of Operational Research
Authors:
Keywords: heuristics
Abstract:

This paper considers a single-echelon inventory system with a warehouse facing compound Poisson customer demand. Normally the warehouse replenishes from an outside supplier according to a continuous review reorder point policy. However, it is also possible to use emergency orders. Such orders incur additional costs but have a much shorter lead time. We consider standard holding and backorder costs as well as ordering costs. A heuristic decision rule for triggering emergency orders is suggested. The decision rule minimizes the expected costs under the assumption that there is only a single possibility for an emergency replenishment, but the rule is used repeatedly as a heuristic. Given a certain reorder point policy for normal replenishments, our decision rule will always reduce the expected costs. A simulation study illustrates that the suggested technique performs well under different conditions.

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