A closed-form solution for the distribution free continuous review integrated inventory model

Abstract

In this paper, we develop an integrated inventory model in a single-vendor single-buyer supply chain under an unknown demand distribution at the buyer. It is assumed that each lot delivered to the buyer contains a random fraction of defective items, and lead time can be reduced at an extra crashing cost. We also consider that the unmet demand at the buyer during the stockout period is partially backordered. A model is formulated to minimize the total expected relevant costs of the system considering an exact expression of the service level constraint to ensure that a certain percentage of customer orders are filled by the buyer. Closed-form expressions are derived for the optimal order quantity and safety factor for given lead time and shipment frequency, and then an algorithm is proposed to find the global optimal solution. Finally, a numerical example is presented to illustrate the solution procedure and sensitivity analysis is carried out to analyze the proposed model.