Inventory Systems with Stochastic Demand and Supply: Properties and Approximations

36 Pages Posted: 3 Apr 2008 Last revised: 22 Feb 2010

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)

Date Written: December 12, 2009

Abstract

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

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

Amanda J. Schmitt (Contact Author)

MIT Center for Transportation & Logistics ( email )

77 Massachusetts Ave., E40
Cambridge, MA 02139
United States

Lawrence V. Snyder

Lehigh University - Department of Industrial and Systems Engineering ( email )

Harold S. Mohler Laboratory
200 West Packer Avenue
Bethlehem, PA 18015-1582
United States

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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