Robustness of Order-Up-to Policies in Lost-Sales Inventory Systems

Marco Bijvank (), Woonghee Tim Huh (), Ganesh Janakiraman () and Wanmo Kang ()
Additional contact information
Marco Bijvank: Haskayne School of Business, University of Calgary, Calgary, Alberta T2N 1N4, Canada
Woonghee Tim Huh: Sauder School of Business, University of British Columbia, Vancouver, British Columbia V6T 1Z4, Canada
Ganesh Janakiraman: Naveen Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080,
Wanmo Kang: Department of Mathematical Sciences, Korea Advanced Institute of Science and Technology, Daejeon, 305-701, South Korea

Operations Research, 2014, vol. 62, issue 5, 1040-1047

Abstract: We study an inventory system under periodic review when excess demand is lost. It is known (Huh et al. 2009) that the best base-stock policy is asymptotically optimal as the lost-sales penalty cost parameter grows. We now show that this result is robust in the following sense: Consider the base-stock level which is optimal in a backordering system (with a per-unit-per-period backordering cost) in which the backorder cost parameter is a function of the lost-sales parameter in the original system. Then there is a large family of functions (mapping the lost-sales cost parameter to the backorder cost parameter) such that the resulting base-stock policy is asymptotically optimal. We also demonstrate the robustness phenomenon through a second result. We consider the base-stock level which is optimal in a backordering system in which a unit of backorder is charged a penalty cost only once (such a system has been studied by Rosling). We show that this base-stock policy is also asymptotically optimal. Furthermore, we show that a modification suggested by Archibald of this base-stock level also results in an asymptotically optimal policy. Finally, we numerically test the performance of this heuristic policy for a wide spectrum of values for the lost-sales penalty cost parameter and illustrate the superior performance of Archibald's method.

Keywords: Inventory control; lost sales; base-stock policy; robustness; optimal policy (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.2014.1298 (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:62:y:2014:i:5:p:1040-1047

Access Statistics for this article

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