Optimal Policy for Continuous-Review Inventory Problem with Partial Backlogging Demand and Positive Lead Time

• Main Authors: Li, Qingying, DING, Qing, Li, Chung-lun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3083
• Institution: Singapore Management University

We consider a continuous-review inventory control problem with an infinite horizon, Poisson demand process, stochastic lead-time, and partial lost sales. This fundamental inventory problem is known to be notoriously difficult even for the case with 100% lost sales. We present a new solution approach for the case with zero lead time. In this new approach, we first transform the given problem into a new problem with a different objective function. We then show that the classical (r, Q) policy is optimal to the transformed problem. Based on this result, we introduce a hierarchical structure to describe the optimal and heuristic policies for problems with nonzero lead times and/or multiple orders.