Service Level Constrained Inventory Systems

40 Pages Posted: 5 Aug 2016 Last revised: 24 Apr 2019

See all articles by Yuchen Jiang

Yuchen Jiang

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Cong Shi

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Siqian Shen

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering

Date Written: April 2019

Abstract

Motivated by the importance of service quality in nowadays customer business environment, we focus on inventory optimization under probabilistic service level constraints, namely, the alpha service level (also known as the ready rate) or the beta service level (also known as the fill rate). Under service level constraints, we consider two canonical stochastic inventory models: (i) the classical inventory control model with backlogging and (ii) the remanufacturing inventory control model with random product returns. The random demands could be nonstationary, evolving and correlated over time. For each model, we first establish the optimality of generalized base-stock policies, and then propose a new approximation algorithm that admits a worst-case performance guarantee of 2. The core concept developed in this paper is called the delayed forced holding and production cost, which is proven effective in dealing with service level constrained inventory systems. We also provide an efficient heuristic algorithm for the multi-item inventory system. Our extensive computational experiments show that the proposed algorithms perform within 2% of optimality.

Keywords: inventory; service level; ready rate; fill rate; remanufacturing; approximation algorithms

Suggested Citation

Jiang, Yuchen and Shi, Cong and Shen, Siqian, Service Level Constrained Inventory Systems (April 2019). Available at SSRN: https://ssrn.com/abstract=2818044 or http://dx.doi.org/10.2139/ssrn.2818044

Yuchen Jiang

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Cong Shi (Contact Author)

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

Siqian Shen

University of Michigan at Ann Arbor - Department of Industrial and Operations Engineering ( email )

1205 Beal Avenue
Ann Arbor, MI 48109
United States

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