A continuous review replenishment-disposal policy for an inventory system with autonomous supply and fixed disposal costs

In this study, we analyze an inventory system facing stochastic external demands and an autonomous supply (independent return flow) in the presence of fixed disposal costs and positive lead times under a continuous review replenishment-disposal policy. We derive the analytical expressions of the operating characteristics of the system; and, construct the objective function to minimize the total expected costs of ordering, holding, purchasing and disposal per unit time subject to a fill rate constraint. An extensive numerical analysis is conducted to study the sensitivity of the policy parameters and the benefit of employing a policy which allows for disposal of excess stock in this setting. We model the net demand process as the superposition of normally distributed external demand and inflows, which is expressed as a Brownian motion process. Our findings indicate that the disposal option results in considerable savings even (i) in the presence of non-zero fixed disposal costs, (ii) large actual demand rates with high return ratios (resulting in small net demands) and (iii) for moderate return ratios with high demand variability.