Large Deviations-Based Asymptotics for Inventory Control in Supply Chains

Ioannis Ch. Paschalidis () and Yong Liu ()
Additional contact information
Ioannis Ch. Paschalidis: Center for Information and Systems Engineering (CISE) and Department of Manufacturing Engineering, Boston University, Boston, Massachusetts 02215
Yong Liu: Center for Information and Systems Engineering (CISE) and Department of Manufacturing Engineering, Boston University, Boston, Massachusetts 02215

Operations Research, 2003, vol. 51, issue 3, 437-460

Abstract: We consider a model of a capacitated single-class supply chain consisting of production facilities (stages) in tandem. External demand is met from the available finished goods inventory maintained in front of the most downstream facility; unsatisfied demand is backlogged. Every stage orders from its upstream facility, thus production is constrained by the local production capacity and the availability of upstream inventory. We propose production policies in two separate cases: (1) when each facility has information about its local inventory only, and (2) when each facility has knowledge of the total downstream inventory. In case (1) the proposed policy guarantees that stockout probabilities at each stage stay bounded below given constants (service level constraints). In case (2) the proposed policy minimizes total expected inventory cost subject to desirable service-level constraints. In both cases the parameters of the proposed policies are obtained analytically based on large deviations asymptotics, which leads to drastic computational savings compared to simulation. An important feature of our model is that it accommodates autocorrelated demand and service processes, both critical features of modern failure-prone manufacturing systems. We demonstrate that detailed distributional information on demand and service processes, which is incorporated into large deviations asymptotics, is critical in inventory control decisions. We discuss extensions to a multiclass setting and to a model where unsatisfied demand is lost instead of backordered.

Keywords: Inventory/production: service-level approximations/heuristics; Inventory/production; uncertainty: correlations in demand and capacity processes; Probability; applications: large deviations (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.51.3.437.14958 (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:inm:oropre:v:51:y:2003:i:3:p:437-460

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().