Abstract
This paper involves developing new mathematical expressions to find reorder point and order quantity for inventory management policies that explicitly consider storage space capacity. Both continuous and periodic reviews, as well as backlogged and lost demand during stockout, are considered. With storage space capacity, when on-hand inventory exceeds the capacity, the over-ordering cost of storage at an external warehouse is charged on a per-unit-period basis. The objective is to minimize the total cost, consisting of ordering, shortage, holding, and over-ordering costs. Demand and lead time are stochastic and discrete in nature. Demand during varying lead time is modeled using an empirical distribution so that the findings are not subject to assumptions of demand and lead time probability distributions. Due to the complexity of the developed mathematical expressions, the problems are solved using an iterative method. The method is tested with problem instances that use real data from industry. Optimal solutions of the problem instance are determined by performing exhaustive search. The proposed method can effectively find optimal solutions for continuous review policies and near optimal solutions for periodic review policies. Fundamental insights about the inventory policies are reported from a comparison between continuous review and periodic review solutions, as well as a comparison between backlog and lost sales cases.
Highlights
This paper focuses on the widely used (R, Q) inventory policy in distribution networks, where an order quantity Q is placed when the inventory position falls on or below the reorder point R at the time of a review
The (R, Q) policy is designed for a continuous review, whereas an order-up-to level policy or basestock policy is for a periodic review
This paper proposes a method to find optimal R and Q for both continuous and periodic reviews as well as for backlog and lost sales cases
Summary
This paper focuses on the widely used (R, Q) inventory policy in distribution networks, where an order quantity Q is placed when the inventory position falls on or below the reorder point R at the time of a review. Continuous reviewing mostly requires a warehouse management system that supports it, whereas periodic reviewing can be performed without such a system. The (R, Q) policy is designed for a continuous review, whereas an order-up-to level policy or basestock policy is for a periodic review. Even without the technology to support a continuous review, some industrial users prefer the (R, Q) policy and use it with a periodic review. This is because some users would not like to change their order quantity every order. Their order quantity has to be a multiple of some pack sizes or container
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