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Partial reservation policy for cost-effective inventory management incorporating customer preferences

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  • Baek, Jung Woo

Abstract

Effective backorder management is essential for balancing costs and customer satisfaction in inventory systems. This study proposes a partial reservation policy that classifies backorders into two types based on customer choices: delayed fulfillment with compensation (Type-1 backorder) or immediate fulfillment without compensation (Type-2 backorder). The policy is applied to a continuous-review production–inventory system with both lost sales and backorders. The system is modeled as a quasi-birth–death (QBD) process to derive long-term performance measures. Numerical experiments demonstrate cost reductions of up to 30% in scenarios without lost sales, with up to 12% achieved even when no compensation is provided. In high-demand settings with lost sales and high lost-sale costs, reductions of 5%–6% are observed. The policy maintains stable performance across varying levels of production time variability, offering a practical solution for reducing operational costs in e-commerce and omni-channel retail environments.

Suggested Citation

  • Baek, Jung Woo, 2026. "Partial reservation policy for cost-effective inventory management incorporating customer preferences," International Journal of Production Economics, Elsevier, vol. 296(C).
    • Handle: RePEc:eee:proeco:v:296:y:2026:i:c:s0925527325002919
    DOI: 10.1016/j.ijpe.2025.109806
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