Reduce shortage with self-reservation policy for a manufacturer paying both fixed and variable stockout expenditure

Boray Huang and Andy Wu

European Journal of Operational Research, 2017, vol. 262, issue 3, 944-953

Abstract: This study considers a single item make-to-stock system with continuous-time production and inventory controls to meet bulk demand with an exponential inter-arrival time. A key issue in this system is the non-convex shortage cost consisting of fixed and variable expenditures when the demand is not fully satisfied. We propose a self-reservation policy by building a Markov Decision Process to minimize the overall cost. We find that the optimal production control is still a base stock policy, but the structure of the optimal self-reservation policy is very complicated. However, if the effective outstanding variable shortage cost is sufficiently large, the optimal self-reservation policy has an easy form of “Reserve All or Nothing.” Our numerical examples indicate the optimal policy may reduce the total average cost by 47% on average.

Keywords: Markov processes; Production management; Reservation policy; Fixed and variable shortage cost (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:262:y:2017:i:3:p:944-953

DOI: 10.1016/j.ejor.2017.03.063

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