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New Policies for the Stochastic Inventory Control Problem with Two Supply Sources

Author

Listed:
  • Anshul Sheopuri

    (Business Insight Group, IBM T. J. Watson Research Center, Hawthorne, New York 10532)

  • Ganesh Janakiraman

    (School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

  • Sridhar Seshadri

    (IROM Department, McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712)

Abstract

We study an inventory system under periodic review in the presence of two suppliers (or delivery modes). The emergency supplier has a shorter lead-time than the regular supplier, but the unit price he offers is higher. Excess demand is backlogged. We generalize the recently studied class of dual index policies [Veeraraghavan, S., A. Scheller-Wolf. 2008. Now or later: Dual index policies for capacitated dual sourcing systems. Oper. Res. 56 (4) 850--864] by proposing two classes of policies. The first class consists of policies that have an order-up-to structure for the emergency supplier. We provide analytical results that are useful for determining optimal or near-optimal policies within this class. This analysis and the policies we propose leverage our observation that the classical “lost sales inventory problem” is a special case of this problem. The second class consists of policies that have an order-up-to structure for the regular supplier. Here, we derive bounds on the optimal order quantity from the emergency supplier, in any period, and use these bounds for finding effective policies within this class. Finally, we undertake an elaborate computational investigation to compare the performance of the policies we propose with that of dual index policies. One of our policies provides an average cost-saving of 1.1% over the best dual index policy and has the same computational requirements. Another policy that we propose has a cost performance similar to the best dual index policy, but its computational requirements are lower.

Suggested Citation

  • Anshul Sheopuri & Ganesh Janakiraman & Sridhar Seshadri, 2010. "New Policies for the Stochastic Inventory Control Problem with Two Supply Sources," Operations Research, INFORMS, vol. 58(3), pages 734-745, June.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:3:p:734-745
    DOI: 10.1287/opre.1090.0799
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    References listed on IDEAS

    as
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