Technical Note—Understanding the Performance of Capped Base-Stock Policies in Lost-Sales Inventory Models

Linwei Xin ()
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Linwei Xin: Booth School of Business, University of Chicago, Chicago, Illinois 60637

Operations Research, 2021, vol. 69, issue 1, 61-70

Abstract: Single-sourcing lost-sales inventory systems with lead times are notoriously difficult to optimize. In this paper, we propose a new family of capped base-stock policies and provide a new perspective on constructing a practical hybrid policy combining two well-known heuristics: base-stock and constant-order policies. Each capped base-stock policy is associated with two parameters: a base-stock level and an order cap. We prove that for any fixed order cap, the capped base-stock policy converges exponentially fast in the base-stock level to a constant-order policy, providing a theoretical foundation for a phenomenon by which a capped dual-index policy converges numerically to a tailored base-surge policy recently observed in other work in a different but related dual-sourcing inventory model. As a consequence, there exists a sequence of capped base-stock policies that are asymptotically optimal as the lead time grows. We also numerically demonstrate its superior performance in general (including small lead times) by comparing it with otherwell-known heuristics.

Keywords: inventory; lost sales; lead time; capped base-stock policy; constant-order policy (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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