Understanding the Performance of Capped Base-Stock Policies in Lost-Sales Inventory Models
Forthcoming in Operations Research
23 Pages Posted: 10 Apr 2019 Last revised: 18 May 2020
Date Written: May 15, 2020
Single-sourcing lost-sales inventory systems with lead times are notoriously difficult to optimize. In this work, we propose a new family of capped base-stock policies and provide a new perspective of constructing a practical hybrid policy combining two well-known heuristics: base-stock and constant-order policies. Each capped base-stock policy is associated with two parameters: a base-stock level and an order cap. We prove that for any fixed order cap, the capped base-stock policy converges exponentially fast in the base-stock level to a constant-order policy, providing a theoretical foundation for a phenomenon that a capped dual-index policy converges numerically to a Tailored Base-Surge policy recently observed in Sun and Van Mieghem (2019) in a different but related dual-sourcing inventory model. As a consequence, there exists a sequence of capped base-stock policies that are asymptotically optimal as the lead time grows. We also numerically demonstrate its superior performance in general (including small lead times) by comparing with other well-known heuristics.
Keywords: inventory, lost-sales, lead time, capped base-stock policy, constant-order policy
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