Optimal Replenishment and Rework with Multiple Unreliable Supply Sources

David D. W. Yao · Shaohui Zheng

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Supply Chain and Inventory Management Reliability and Maintenance Optimization Sustainable Supply Chain Management

Abstract

We study a production-inventory system with multiple unreliable supply sources. Through inspection and rework, the system can improve the quality of the units received from the supply sources. There are two interleaved decisions: the replenishment quantities from the sources and the inspection-rework quantities among the units received. We show the optimal solution to the replenishment decision can be efficiently derived from a greedy algorithm, and inspection-rework is optimally applied to a single source identified by the algorithm. Furthermore, in the case of linear cost functions, it is optimal to place orders from two supply sources, i.e., dual sourcing. The results extend to the infinite-horizon case, where an order-up-to policy is optimal. The model also readily adapts to situations in which the supply imperfection takes the form of a reduced delivery quantity (yield loss).

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References

1993Diversification Under Supply Uncertainty 1965Optimal Policy for a Multi-Product, Dynamic, Nonstationary Inventory Problem 1999Single-Period Multiproduct Inventory Models with Substitution 1990Optimal and Approximate Policies in Multiperiod, Multilocation Inventory Models with Transshipments 1999Random Yield and Random Demand in a Production System with Downward Substitution 1969Optimality of Myopic Inventory Policies for Several Substitute Products 1993Diversification under yield randomness in inventory models 1990Yield randomness, cost tradeoffs, and diversification in the EOQ model

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