An Inventory Model for Slow Moving Items Subject to Obsolescence

Çerağ Pinçe and Rommert Dekker

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

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 show 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 find that the advance policy change results in significant cost savings and the approximation yields near optimal expected total costs.

Keywords: advance policy change; excess stock; installed base; inventory control; obsolescence; spare parts (search for similar items in EconPapers)
JEL-codes: L23 M M11 R4 (search for similar items in EconPapers)
Date: 2009-11-02
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Journal Article: An inventory model for slow moving items subject to obsolescence (2011)
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