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

See all articles by Linwei Xin

Linwei Xin

University of Chicago - Booth School of Business

Date Written: May 15, 2020

Abstract

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

Suggested Citation

Xin, Linwei, Understanding the Performance of Capped Base-Stock Policies in Lost-Sales Inventory Models (May 15, 2020). Forthcoming in Operations Research, Available at SSRN: https://ssrn.com/abstract=3357241 or http://dx.doi.org/10.2139/ssrn.3357241

Linwei Xin (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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