Optimal Inventory Policies with Service-Level Constraints

Karen Aardal · Örjan Jonsson

42 citations0/0 files storedJournal of the Operational Research Society

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Supply Chain and Inventory Management Management and Optimization Techniques Operations Management Techniques

Abstract

In a practical situation it is often difficult to determine the value of the shortage costs for use in in ventory-control systems. However, in cost-minimization problems including service-level constraints, shortage costs are implicitly prevailing. With the purpose of exploring these relations, a continuous review (Q, r) stock-control system is considered, where the order points and lot sizes are computed simultaneously. Instead of explicitly expressing the shortage cost in the objective function, it is taken into consideration through a service-level constraint. The shadow price of this constraint can in some sense be interpreted as the shortage cost corresponding to the requested service level. By changing the value of the service level, interesting relations between shortage costs and service levels can be viewed for different sets of other inventory parameters. In order to investigate the sensitivity for probabilistic variations in the input data, two different probability distributions are used to describe the lead-time demand.

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References

1979Decision Systems for Inventory Management and Production Planning 1975Operations Research in Production Planning, Scheduling and Inventory Control.1980Five Popular Probability Density Functions: A Comparison in the Field of Stock-Control Models 1979Using Optimal Policy Surfaces to Analyze Aggregate Inventory Tradeoffs 1978Applications of the Weibull Distribution in Inventory Control

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2008A single-vendor single-buyer production-inventory model with controllable lead time and service level constraint for decaying items 1999RETAIL INVENTORY CONTROL WITH LOST SALES, SERVICE CONSTRAINTS, AND FRACTIONAL LEAD TIMES 2013Periodic review inventory systems with a service level criterion 2010Ordering cost reduction in probabilistic inventory model with controllable lead time and a service level

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