Repairable Stocking and Expediting in a Fluctuating Demand Environment: Optimal Policy and Heuristics

We consider a single stock‐point for a repairable item facing Markov modulated Poisson demand. Repair of failed parts may be expedited at an additional cost to receive a shorter lead time. Demand that cannot be filled immediately is backordered and penalized. The manager decides on the number of spare repairables to purchase and on the expediting policy. We characterize the optimal expediting policy using a Markov decision process formulation and provide closed‐form necessary and sufficient conditions that determine whether the optimal policy is a type of threshold policy or a no‐expediting policy. We derive further asymptotic results as demand fluctuates arbitrarily slowly. In this regime, the cost of this system can be written as a weighted average of costs for systems facing Poisson demand. These asymptotics are leveraged to show that approximating Markov modulated Poisson demand by stationary Poisson demand can lead to arbitrarily poor results. We propose two heuristics based on our analytical results, and numerical tests show good performance with average optimality gaps of 0.11% and 0.33% respectively. Naive heuristics that ignore demand fluctuations have average optimality gaps of more than 11%. This shows that there is great value in leveraging knowledge about demand fluctuations in making repairable expediting and stocking decisions.