Reduce shortage with self-reservation policy for a manufacturer paying both fixed and variable stockout expenditure

Boray Huang, Andy Wu (Lead / Corresponding author)

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This study considers a single item make-to-stock system with continuous-time production and inventory controls to meet bulk demand with an exponential inter-arrival time. A key issue in this system is the non-convex shortage cost consisting of fixed and variable expenditures when the demand is not fully satisfied. We propose a self-reservation policy by building a Markov Decision Process to minimize the overall cost. We find that the optimal production control is still a base stock policy, but the structure of the optimal self-reservation policy is very complicated. However, if the effective outstanding variable shortage cost is sufficiently large, the optimal self-reservation policy has an easy form of “Reserve All or Nothing.” Our numerical examples indicate the optimal policy may reduce the total average cost by 47% on average.

Original languageEnglish
Pages (from-to)944-953
Number of pages10
JournalEuropean Journal of Operational Research
Volume262
Issue number3
Early online date31 Mar 2017
DOIs
Publication statusPublished - 1 Nov 2017

Keywords

  • Fixed and variable shortage cost
  • Markov processes
  • Production management
  • Reservation policy

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