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: | Axster Sven |
Keywords: | heuristics |
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.