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Reduce shortage with self-reservation policy for a manufacturer paying both fixed and variable stockout expenditure

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  • Huang, Boray
  • Wu, Andy

Abstract

This study considers a single item make-to-stock system with continuous-time production and inventory controls to meet bulk demand with an exponential inter-arrival time. A key issue in this system is the non-convex shortage cost consisting of fixed and variable expenditures when the demand is not fully satisfied. We propose a self-reservation policy by building a Markov Decision Process to minimize the overall cost. We find that the optimal production control is still a base stock policy, but the structure of the optimal self-reservation policy is very complicated. However, if the effective outstanding variable shortage cost is sufficiently large, the optimal self-reservation policy has an easy form of “Reserve All or Nothing.” Our numerical examples indicate the optimal policy may reduce the total average cost by 47% on average.

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  • Huang, Boray & Wu, Andy, 2017. "Reduce shortage with self-reservation policy for a manufacturer paying both fixed and variable stockout expenditure," European Journal of Operational Research, Elsevier, vol. 262(3), pages 944-953.
    • Handle: RePEc:eee:ejores:v:262:y:2017:i:3:p:944-953
    DOI: 10.1016/j.ejor.2017.03.063
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