May reorder point help under disruptions?

Abstract

We study a continuous-review inventory problem of a retailer observing constant deterministic demand and ordering from a supplier. This is an extension of Economic Order Quantity model (EOQ), in which both supplier and retailer are subject to random disruptions. The supplier is assumed to be at two states, which are available and unavailable. When the retailer is disrupted, all on-hand inventory is destroyed, but the retailer recovers immediately to serve customers. All unsatisfied demand at retailer is assumed to be lost. We create a mathematical model to determine optimal parameters of an order-up-to type policy for the retailer and investigate the importance of a non-zero reorder point for the retailer. With computational experiments, we identify when a non-zero reorder point is cost saving, and compare our solution with classical EOQ.