A note on periodic review inventory model with controllable setup cost and lead time

Abstract

In this study, we investigate the periodic review inventory models with a mixture of backorders and lost sales by controlling lead time and setup cost simultaneously to reduce the inventory operating cost. It is assumed that the probability distribution of the protection interval, i.e., review period plus lead time, demand is unknown but its first two moments are given, we apply the minimax distribution free procedure to solve this problem. An algorithm to find the optimal solutions is developed. Specifically, from the results of numerical examples, it can be shown that, the significant savings can be achieved through the reductions of lead time and setup cost. Scope and purpose In most of the literature dealing with periodic review inventory problems, both lead time and setup cost are treated as constants. Recently, Ouyang and Chuang (J. Inf. Manage. Sci. 9 (1998) 25) presented a minimax distribution free procedure for the periodic review inventory model which involves a controllable lead time. We note that the paper is focusing on the benefits from lead time reduction in which setup cost is viewed as a fixed constant. From the Japanese experience of Just-In-Time (JIT) production, it has been observed in many manufacturing settings including job shops, batch shops and flow shops, whose setup cost can be reduced by investing capital. For this reason, we attempt to extend Ouyang and Chuang's model by formulating a modified periodic review model to accommodate more practical features of the real inventory systems.