Abstract
This paper assumes that an arrival order lot may contain some defective items, and the defective rate is a random variable. We present a continuous review inventory model with a mixture ofback orders and lost sales in which the order quantity, reorder point, and lead time are viewed as decision variables. Instead of having a stockout cost term in the objective nmction, a service level constraint is added to the model. In this study, we consider the case that the form of the probability distribution of lead time demand is unknown. and only assume that the mean and variance oflead time demand are known. We develop a procedure to determine the optimal ordering strategy. Furthermore, the sensitivity analysis is also studied.
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