Exact and heuristic linear-inflation policies for an inventory model with random yield and arbitrary lead times

Karl Inderfurth () and Gudrun Kiesmüller ()
Additional contact information
Karl Inderfurth: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg
Gudrun Kiesmüller: Department of Business Administration, Christian Albrechts University

No 130007, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: We investigate a periodic inventory system for a single item with stochastic demand and random yield. Since the optimal policy for such a system is complicated we study the class of stationary linear-inflation policies where orders are only placed if the inventory position is below a critical stock level, and where the order quantity is controlled by a yield inflation factor. We consider two different models for the uncertain supply: binomial and stochastically proportional yield and we allow positive and constant lead times as well as asymmetric demand and yield distributions. In this paper we propose two novel approaches to derive optimal and near-optimal numerical values for the critical stock level, minimizing the average holding and backorder cost for a given inflation factor. First, we present a Markov chain approach, which is exact in case of negligible lead time. Second, we provide a steady state analysis to derive approximate closed-form expressions for the optimal critical stock level. We conduct an extensive numerical study to test the performance of our approaches. The numerical experiments reveal an excellent performance of both approaches. Since our derived formulas are easily implementable and highly accurate they are very valuable for practical application.

Keywords: Inventory/production systems; Heuristics; Random Yield; Lead times; Stochastic model applications (search for similar items in EconPapers)
JEL-codes: C02 M11 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2013-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.fww.ovgu.de/fww_media/femm/femm_2013/2013_07.pdf First version, 2011 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mag:wpaper:130007

Access Statistics for this paper

More papers in FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management Contact information at EDIRC.
Bibliographic data for series maintained by Guido Henkel ().