Beyond LIFO and FIFO: Exploring an Allocation-In-Fraction-Out (AIFO) policy in a two-warehouse inventory model

Abstract

The classical formulation of a two-warehouse inventory model is often based on the Last-In-First-Out (LIFO) or First-In-First-Out (FIFO) dispatching policy. The LIFO policy relies upon inventory stored in a rented warehouse (RW), with an ample capacity, being consumed first, before depleting inventory of an owned warehouse (OW) that has a limited capacity. Consumption works the other way around for the FIFO policy. In this paper, a new policy entitled “Allocation-In-Fraction-Out (AIFO)” is proposed. Unlike LIFO and FIFO, AIFO implies simultaneous consumption fractions associated with RW and OW. That said, the goods at both warehouses are depleted by the end of the same cycle. This necessitates the introduction of a key performance indicator to trade-off the costs associated with AIFO, LIFO and FIFO. Consequently, three general two-warehouse inventory models for items that are subject to inspection for imperfect quality are developed and compared – each underlying one of the dispatching policies considered. Each sub-replenishment that is delivered to OW and RW incurs a distinct transportation cost and undertakes a 100 per cent screening. The mathematical formulation reflects a diverse range of time-varying forms. The paper provides illustrative examples that analyse the behaviour of deterioration, value of information and perishability in different settings. For perishable products, we demonstrate that LIFO and FIFO may not be the right dispatching policies. Further, relaxing the inherent determinism of the maximum capacity associated with OW, not only produces better results and implies comprehensive learning, but may also suggest outsourcing the inventory holding through vendor managed inventory.