Effects of Supply Disruption on Optimal Inventory Policy: The Case of (r,S) Continuous Review Inventory Policy

Abstract

In this study, we focus on the derivation of an optimal inventory policy to help tackle the supply disruption problem. The main objective of the study is to derive an optimal inventory policy for a retailer who is facing stochastic supply disruption and stochastic demand, operating under a (r, S) continuous review policy so as to minimise the total inventory cost per time-unit. Renewal reward theorem is used to help develop the total inventory cost function which consists of order cost, time-dependent holding and shortage costs in the existence of replenishment lead time. Numerical experiments and sensitivity analyses are then conducted to illustrate the applicability of the developed inventory policy.