Inventory Systems with Stochastic Demand and Supply: Properties and Approximations
Amanda J. Schmitt
MIT Center for Transportation & Logistics
Lawrence V. Snyder
Lehigh University - Department of Industrial and Systems Engineering
Zuo-Jun Max Shen
University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)
December 12, 2009
We model a retailer whose supplier is subject to complete supply disruptions. We combine discrete-event uncertainty (disruptions) and continuous sources of uncertainty (stochastic demand or supply yield), which have different impacts on optimal inventory settings. This prevents optimal solutions from being found in closed form. We develop a closed-form approximate solution by focusing on a single stochastic period of demand or yield. We show how the familiar newsboy fractile is a critical trade-off in these systems, since the optimal base-stock policies balance inventory holding costs with the risk of shortage costs generated by a disruption.
Number of Pages in PDF File: 36
Keywords: Supply disruptions, Inventory management
Date posted: April 3, 2008 ; Last revised: February 22, 2010
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