Spare Parts Inventory Management with Substitution-Dependent Reliability

Abstract

Motivated to apply sustainable supply chain principles to air-pollution control systems, this paper presents a dynamic inventory-management approach where substitution is possible to maintain these systems’ equipment. An air-pollution control system’s subsequent reliability depends on the replacement equipment selected. The corresponding problem is formulated as a stochastic dynamic program. Because the state and action space are prohibitively large, the approximate policy iteration algorithm is adapted to generate high-quality solutions. Therefore, this work replaces the value function with an affine combination of nonlinear basis functions and shows that a relaxation of the policy improvement step requires the solving of a mixed integer linear program. This approach helps in the designing of an algorithm that improves the quality of the approximation by solving a convex optimization problem. To assess the quality of resulting solutions, a lower bound is developed by considering a relaxation of the problem. In addition, two classes of heuristics are proposed based on a rolling-horizon two-stage stochastic programming formulation of the problem and a standard base-stock ordering policy. The performance of proposed policies is tested on a variety of settings, and results show that the approximate dynamic programming policies are near-optimal in the settings of interest and significantly outperform available benchmarks. The following analysis reveals that the proposed inventory replenishment policies resemble a base-stock policy with occasional deviations, and assignment and substitution decisions are determined by balancing the reliability with ordering, holding, and shortage costs. The online supplement is available at https://doi.org/10.1287/ijoc.2017.0794 .