A Single-Product Inventory Model for Multiple Demand Classes

Hasan Arslan (), Stephen C. Graves () and Thomas A. Roemer ()
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Hasan Arslan: Sawyer Business School, Suffolk University, Boston, Massachusetts 02108
Stephen C. Graves: Leaders for Manufacturing Program and A. P. Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
Thomas A. Roemer: The Rady School of Management, University of California, San Diego, La Jolla, California 92093

Management Science, 2007, vol. 53, issue 9, 1486-1500

Abstract: We consider a single-product inventory system that serves multiple demand classes, which differ in their shortage costs or service-level requirements. We assume a critical-level control policy, and a backorder clearing mechanism in which we treat a backorder for a lower-priority class equivalent to a reserve-stock shortfall for the higher-priority class. We show the equivalence between this inventory system and a serial inventory system. Based on this equivalence, we develop a model for cost evaluation and optimization under the assumptions of Poisson demand, deterministic replenishment lead time, and a continuous-review (Q, R) policy with rationing. We propose a computationally efficient heuristic and develop a bound on its performance. We provide a numerical experiment to show the effectiveness of the heuristic and the value from a rationing policy. Finally, we describe how to extend the model to permit service times, and how to extend the model to a multi-echelon setting.

Keywords: inventory rationing; service differentiation; serial inventory system; priority demand classes (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (36)

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