36 Pages Posted: 3 Apr 2008 Last revised: 22 Feb 2010
Date Written: 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.
Keywords: Supply disruptions, Inventory management
Suggested Citation: Suggested Citation
Schmitt, Amanda J. and Snyder, Lawrence V. and Shen, Zuo-Jun Max, Inventory Systems with Stochastic Demand and Supply: Properties and Approximations (December 12, 2009). Available at SSRN: https://ssrn.com/abstract=1115410 or http://dx.doi.org/10.2139/ssrn.1115410