A periodic review integrated inventory model with controllable safety stock and setup cost under service level constraint and distribution-free demand

Abstract

In this study, we consider a stochastic integrated manufacturer-retailer inventory model with service level constraint. The model analyzed in this article considers the situation in which the vendor and the buyer establish a long-term contract and strategic partnership to jointly determine the best strategy. The lead time and setup cost are assumed can be controlled by an additional crashing cost and an investment, respectively. It is assumed that shortages are allowed and partially backlogged on the buyer’s side, and that the protection interval (i.e., review period plus lead time) demand distribution is unknown but has given finite first and second moments. The objective is to apply the minmax distribution free approach to simultaneously optimize the review period, the lead time, the setup cost, the safety factor, and the number of deliveries in order to minimize the joint total expected annual cost. The service level constraint guarantees that the service level requirement can be satisfied at the worst case. By constructing Lagrange function, the analysis regarding the solution procedure is conducted, and a solution algorithm is then developed. Moreover, a numerical example and sensitivity analysis are given to illustrate the proposed model and to provide some observations and managerial implications.