Optimal Policies for Inventory Systems with Priority Demand Classes

Katia C. Frank (), Rachel Q. Zhang () and Izak Duenyas ()
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Katia C. Frank: Delta Technology, Atlanta, Georgia 30354
Rachel Q. Zhang: Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853
Izak Duenyas: University of Michigan Business School, Ann Arbor, Michigan 48109

Operations Research, 2003, vol. 51, issue 6, 993-1002

Abstract: We consider a periodic review inventory system with two priority demand classes, one deterministic and the other stochastic. The deterministic demand must be met immediately in each period. However, the units of stochastic demand that are not satisfied during the period when demand occurs are treated as lost sales. At each decision epoch, one has to decide not only whether an order should be placed and how much to order, but also how much demand to fill from the stochastic source. The firm has the option to ration inventory to the stochastic source (i.e., not satisfy all customer demand even though there is inventory in the system).We first characterize the structure of the optimal policy. We show that, in general, the optimal order quantity and rationing policy are state dependent and do not have a simple structure. We then propose a simple policy, called ( s, k, S ) policy, where s and S (ordering policy) determine when and how much to order, while k (rationing policy) specifies how much of the stochastic demand to satisfy. We report the results of a numerical study, which shows that this simple policy works extremely well and is very easy to compute.

Keywords: Inventory/production: policies; Inventory/production: deterministic/stochastic; Inventory/production: approximations/heuristics (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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