A Continuous Review Inventory Model with Advance Policy Change and Obsolescence

Çerağ Pinçe and Rommert Dekker

No EI 2009-45, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: In this paper, we consider a continuous review inventory system of a slow moving item for which the demand rate drops to a lower level at a pre-determined time. Inventory system is controlled according to one-for-one replenishment policy with fixed lead time. Adaptation to the lower demand rate is achieved by changing the control policy in advance and letting the demand take away the excess stocks. We showed that the timing of the control policy change primarily determines the tradeoff between backordering penalties and obsolescence costs. We propose an approximate solution for the optimal time to shift to the new control policy minimizing the expected total cost during the transient period. We found that the advance policy change results in significant cost savings and our model yields near optimal expected total costs.

Keywords: advance policy changes; excess stock; installed base; inventory control; obsolescence; spare parts (search for similar items in EconPapers)
Date: 2010-03-31
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Citations: View citations in EconPapers (1)

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