Inventory Models with Alternative Delivery Lead Times, Demand Backlogging, and Priority Rules

40 Pages Posted: 6 Feb 2009 Last revised: 23 May 2012

See all articles by Haifeng Wang

Haifeng Wang

Tsinghua University - Department of Automation; The Chinese University of Hong Kong - Department of Systems Engineering & Engineering Management

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: December 28, 2009

Abstract

A supplier provides several lead-time options to its customers in a periodic review inventory system. The replenishment lead time is a multiple of the inventory review cycle. Customers are classified into two groups: short lead-time customers requiring the product immediately and long lead-time customers to whom the supplier may deliver immediately or in the next cycle. We consider an inventory-commitment problem, in which the supplier allocates its on-hand inventory to these two groups of customers. When inventory runs out, the supplier backlogs orders to future cycles. Therefore, the supplier faces two problems: how the on-hand inventories are allocated between the two classes of customers and how the backlogged orders are cleared when replenishments arrive? We treat the former as an inventory-commitment problem and handle the latter with priority rules. We solve the former by dynamic programming and use three priority rules in clearing backlogs. We also explore the optimal inventory replenishment issue and evaluate the performance of each priority rule.

Keywords: Inventory Models, Lead times, backloggging, priority rules, customer classes, FCFS, make-to stock, make-to-order, two critical number policies

JEL Classification: C61, M11

Suggested Citation

Wang, Haifeng and Yan, Houmin and Sethi, Suresh, Inventory Models with Alternative Delivery Lead Times, Demand Backlogging, and Priority Rules (December 28, 2009). Available at SSRN: https://ssrn.com/abstract=1338914 or http://dx.doi.org/10.2139/ssrn.1338914

Haifeng Wang

Tsinghua University - Department of Automation ( email )

Beijing, 100084
China

The Chinese University of Hong Kong - Department of Systems Engineering & Engineering Management ( email )

Hong Kong

Houmin Yan

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering & Engineering Management ( email )

Shatin, New Territories
Hong Kong

Suresh Sethi (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

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