Leadtime management in a periodic-review inventory system: A state-dependent base-stock policy

Jun-Yeon Lee, Leroy B. Schwarz
2009 European Journal of Operational Research  
We examine a single-item, periodic-review inventory system with stochastic leadtimes, in which a replenishment order is delivered immediately or one period later, depending probabilistically on costly effort. The objective is to determine an inventory policy and an effort-choice strategy that minimize the expected total costs. Our analytical and computational analysis suggests that (i) a state-dependent base-stock policy is optimal, (ii) the optimal effort strategy is such that the marginal
more » ... of effort is equal to the value of immediate delivery, and (iii) the cost impact of leadtime reduction can be very large. We also provide some counter-intuitive results, compared with the traditional multi-period newsvendor model. ABSTRACT We examine a single-item, periodic-review inventory system with stochastic leadtimes, in which a replenishment order is delivered immediately or one period later, depending probabilistically on costly effort. The objective is to determine an inventory policy and an effort-choice strategy that minimize the expected total costs. Our analytical and computational analysis suggests that (i) a state-dependent base-stock policy is optimal, (ii) the optimal effort strategy is such that the marginal cost of effort is equal to the value of immediate delivery, and (iii) the cost impact of leadtime reduction can be very large. We also provide some counter-intuitive results, compared with the traditional multi-period newsvendor model. Text Only Including Abstract/Text + Figs + Tables * Stanford University Press: Stanford, CA; 1958. Karlin S, Scarf H. Inventory models of the Arrow-Harris-Marschak type with time lag. In: Arrow K, Karlin S, Scarf H (Eds), Studies in the mathematical theory of inventory and production, Stanford University Press: Stanford, CA; 1958. Lee J, Schwarz LB. Leadtime reduction in a (Q, r) inventory system: An agency perspective.
doi:10.1016/j.ejor.2008.10.024 fatcat:xdus3poabrhgvo5q3u5ntkzknq