Two-product inventory management with fixed costs and supply uncertainty

Abstract

This paper determines the optimal ordering policy for a two-product, periodic-review inventory problem in which the probability of supply availability is unknown. Moreover, there are two different fixed costs assigned to each product. Demand rates are random variables with known probability density functions, and the supply availability for each product is updated at the beginning of each time period. We prove the optimality of (s,S) policy with a monotone switching curve that indicates the priority of production, where the order-up-to levels and the reorder points are functions of supply availability information. A simple computation is proposed to calculate the two threshold levels. Bayesian updating helps to manage the optimal ordering policy by updating supply disruption information. Numerical results show that improving the accuracy of the forecast leads to making a better ordering decision and eliminating the negative effect of supply disruption on the total cost.