An optimal constant level rationing policy under service level constraints

Abstract

We analyze a periodic review inventory system where inventory of a single item is used to serve high and low priority customers. High priority customers demand a higher service level than low priority customers and both types of customers can have quite general discrete demand distributions. The inventory is controlled by a (S, CL)-policy, where S denotes the base stock level and CL specifies the critical level, i.e., the amount of inventory reserved for high priority demand. We consider a policy, where the critical level is constant over time, which is not optimal, but makes the model analytically tractable. Unlike previous research, we clear backorders optimally and find the optimal solution. We also derive structural results.