Optimal policies for a multi‐product inventory system with negotiable lead times

Abstract

Abstract The objective of this paper is to determine the optimum inventory policy for a multi‐product periodic review dynamic inventory system. At the beginning of each period two decisions are made for each product. How much to “normal order” with a lead time of λn periods and how much to “emergency order” with a lead time of λe periods, where λe = λn ‐ 1. It is assumed that the emergency ordering costs are higher than the normal ordering costs. The demands for each product in successive periods are assumed to form a sequence of independent identically distributed random variables with known densities. Demands for individual products within a period are assumed to be non‐negative, but they need not be independent. Whenever demand exceeds inventory their difference is backlogged rather than lost. The ordering decisions are based on certain costs and two revenue functions. Namely, the procurement costs which are assumed to be linear for both methods of ordering, convex holding and penalty costs, concave salvage gain functions, and linear credit functions. There is a restriction on the total amount that can be emergency ordered for all products. The optimal ordering policy is determined for the one and N‐period models.

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