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A Single-Product Inventory Model for Multiple Demand Classes

Author

Listed:
  • Hasan Arslan

    (Sawyer Business School, Suffolk University, Boston, Massachusetts 02108)

  • Stephen C. Graves

    (Leaders for Manufacturing Program and A. P. Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Thomas A. Roemer

    (The Rady School of Management, University of California, San Diego, La Jolla, California 92093)

Abstract

We consider a single-product inventory system that serves multiple demand classes, which differ in their shortage costs or service-level requirements. We assume a critical-level control policy, and a backorder clearing mechanism in which we treat a backorder for a lower-priority class equivalent to a reserve-stock shortfall for the higher-priority class. We show the equivalence between this inventory system and a serial inventory system. Based on this equivalence, we develop a model for cost evaluation and optimization under the assumptions of Poisson demand, deterministic replenishment lead time, and a continuous-review (Q, R) policy with rationing. We propose a computationally efficient heuristic and develop a bound on its performance. We provide a numerical experiment to show the effectiveness of the heuristic and the value from a rationing policy. Finally, we describe how to extend the model to permit service times, and how to extend the model to a multi-echelon setting.

Suggested Citation

  • Hasan Arslan & Stephen C. Graves & Thomas A. Roemer, 2007. "A Single-Product Inventory Model for Multiple Demand Classes," Management Science, INFORMS, vol. 53(9), pages 1486-1500, September.
    • Handle: RePEc:inm:ormnsc:v:53:y:2007:i:9:p:1486-1500
    DOI: 10.1287/mnsc.1070.0701
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    References listed on IDEAS

    as
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