Approximate Order-up-to Policies for Inventory Systems with Binomial Yield

Wanrong Ju, Adriana Gabor and Jan-Kees van Ommeren

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: This paper studies an inventory policy for a retailer who orders his products from a supplier whose deliveries only partially satisfy the quality require- ments. We model this situation by an infinite-horizon periodic-review model with binomial random yield and positive lead time. We propose an order- up-to policy based on approximating the inventory model with unreliable supplier by a model with a reliable supplier and suitably modified demand distribution. The performance of the order-up-to policy is verified by com- paring it with both the optimal policy and the safety stock policy proposed in Inderfurth & Vogelgesang (2013). Further, we extend our approximation to a dual-sourcing model with two suppliers: the first slow and unreliable, and the other fast and fully reliable. Compared to the dual-index order- up-to policy for the model with full information on the yield, the proposed approximation gives promising results.

Keywords: inventory; yield uncertainty; order-up-to policy (search for similar items in EconPapers)
Date: 2013-12-31
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