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Performance evaluation of a production/inventory system with periodic review and endogenous lead times

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  • Robert N. Boute
  • Marc R. Lambrecht
  • Benny Van Houdt

Abstract

This paper considers a discrete time, single item production/inventory system with random period demands. Inventory levels are reviewed periodically and managed using a base‐stock policy. Replenishment orders are placed with the production system which is capacitated in the sense that there is a single server that sequentially processes the items one at a time with stochastic unit processing times. In this setting the variability in demand determines the arrival pattern of production orders at the queue, influencing supply lead times. In addition, the inventory behavior is impacted by the correlation between demand and lead times: a large demand size corresponds to a long lead time, depleting the inventory longer. The contribution of this paper is threefold. First, we present an exact procedure based on matrix‐analytic techniques for computing the replenishment lead time distribution given an arbitrary discrete demand distribution. Second, we numerically characterize the distribution of inventory levels, and various other performance measures such as fill rate, base‐stock levels and optimal safety stocks, taking the correlation between demand and lead times into account. Third, we develop an algorithm to fit the first two moments of the demand and service time distribution to a discrete phase‐type distribution with a minimal number of phases. This provides a practical tool to analyze the effect of demand variability, as measured by its coefficient of variation, on system performance. We also show that our model is more appropriate than some existing models of capacitated systems in discrete time. © 2007 Wiley Periodicals, Inc. Naval Research Logistics, 2007

Suggested Citation

  • Robert N. Boute & Marc R. Lambrecht & Benny Van Houdt, 2007. "Performance evaluation of a production/inventory system with periodic review and endogenous lead times," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(4), pages 462-473, June.
    • Handle: RePEc:wly:navres:v:54:y:2007:i:4:p:462-473
    DOI: 10.1002/nav.20222
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    References listed on IDEAS

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    2. Jalali, Hamed & Carmen, Raïsa & Van Nieuwenhuyse, Inneke & Boute, Robert, 2019. "Quality and pricing decisions in production/inventory systems," European Journal of Operational Research, Elsevier, vol. 272(1), pages 195-206.
    3. Babai, M. Zied & Dai, Yong & Li, Qinyun & Syntetos, Aris & Wang, Xun, 2022. "Forecasting of lead-time demand variance: Implications for safety stock calculations," European Journal of Operational Research, Elsevier, vol. 296(3), pages 846-861.
    4. Hernan Caceres & Dongchen Yu & Alexander Nikolaev, 2018. "Evaluating shortfall distributions in periodic inventory systems with stochastic endogenous demands and lead-times," Annals of Operations Research, Springer, vol. 271(2), pages 405-427, December.

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