A periodic review policy with quality improvement, setup cost reduction, backorder price discount, and controllable lead time

Abstract

This paper explores a periodic review inventory model under stochastic demand. The setup (or ordering) cost and the lead time are controllable. The model considers an imperfect production process, whose quality can be improved by means of an investment. A backorder price discount to motivate customers to wait for backorders is included. The demand in the protection interval is first assumed Gaussian; then, the distribution-free approach is adopted. The objective is to determine the review period, the setup cost, the quality level, the backorder price discount, and the length of lead time that minimize the long-run expected total cost per time unit. A solution method for each case is presented. Numerical experiments show that substantial savings can be achieved if the quality level, the setup cost and the lead time are controlled, and if a backorder price discount is applied. A sensitivity analysis is finally carried out.

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