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Optimal Policies for Inventory Systems with Priority Demand Classes

Author

Listed:
  • Katia C. Frank

    (Delta Technology, Atlanta, Georgia 30354)

  • Rachel Q. Zhang

    (Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853)

  • Izak Duenyas

    (University of Michigan Business School, Ann Arbor, Michigan 48109)

Abstract

We consider a periodic review inventory system with two priority demand classes, one deterministic and the other stochastic. The deterministic demand must be met immediately in each period. However, the units of stochastic demand that are not satisfied during the period when demand occurs are treated as lost sales. At each decision epoch, one has to decide not only whether an order should be placed and how much to order, but also how much demand to fill from the stochastic source. The firm has the option to ration inventory to the stochastic source (i.e., not satisfy all customer demand even though there is inventory in the system).We first characterize the structure of the optimal policy. We show that, in general, the optimal order quantity and rationing policy are state dependent and do not have a simple structure. We then propose a simple policy, called ( s, k, S ) policy, where s and S (ordering policy) determine when and how much to order, while k (rationing policy) specifies how much of the stochastic demand to satisfy. We report the results of a numerical study, which shows that this simple policy works extremely well and is very easy to compute.

Suggested Citation

  • Katia C. Frank & Rachel Q. Zhang & Izak Duenyas, 2003. "Optimal Policies for Inventory Systems with Priority Demand Classes," Operations Research, INFORMS, vol. 51(6), pages 993-1002, December.
    • Handle: RePEc:inm:oropre:v:51:y:2003:i:6:p:993-1002
    DOI: 10.1287/opre.51.6.993.24923
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    References listed on IDEAS

    as
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    3. Albert Y. Ha, 1997. "Inventory Rationing in a Make-to-Stock Production System with Several Demand Classes and Lost Sales," Management Science, INFORMS, vol. 43(8), pages 1093-1103, August.
    4. Matthew J. Sobel & Rachel Q. Zhang, 2001. "Inventory Policies for Systems with Stochastic and Deterministic Demand," Operations Research, INFORMS, vol. 49(1), pages 157-162, February.
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    6. Donald M. Topkis, 1968. "Optimal Ordering and Rationing Policies in a Nonstationary Dynamic Inventory Model with n Demand Classes," Management Science, INFORMS, vol. 15(3), pages 160-176, November.
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    Full references (including those not matched with items on IDEAS)

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