Dynamic inventory rationing: How to allocate stock according to managerial priorities. An empirical study

Abstract

In spare part distribution, contracts characterized by different unit prices, lead times, minimum order quantities are usually offered to different types of customers. In this context, one of the main problems is the decision on the allocation of the on–hand inventory to the different customers in order to minimize the total back–order cost. In this paper, we propose two allocation policies that use a dynamic critical level to reserve on-hand inventory for high priority customers. The first policy sets the critical level according to a target service level for high priority demand, while the other sets the critical level according to the back-order costs for the different classes of customers. The effectiveness of the two policies with respect to no rationing or stock piling polices is shown using the data of a European spare part company. Moreover, the relationship between the two policies is evaluated from a managerial perspective.