Optimal inventory policy with supply uncertainty and demand cancellation

Yeo, W. M. and Yuan, X.-M. (2011) Optimal inventory policy with supply uncertainty and demand cancellation. European Journal of Operational Research, 211(1), pp. 26-34. (doi: 10.1016/j.ejor.2010.10.031)

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We consider a periodic review model where the firm manages its inventory under supply uncertainty and demand cancellation. We show that because of supply uncertainty, the optimal inventory policy has the structure of re-order point type. That is, we order if the initial inventory falls below this re-order point, otherwise we do not order. This is in contrast to the work of Yuan and Cheung (2003) who prove the optimality of an order up to policy in the absence of supply uncertainty. We also investigate the impact of supply uncertainty and demand cancellation on the performance of the supply chain. Using our model, we are able to quantify the importance of reducing the variance of either the distribution of yield or the distribution of demand cancellation. The single, multiple periods and the infinite horizon models are studied.

Item Type:Articles
Keywords:Inventory, demand cancellation, supply uncertainty, stochastic ordering, dynamic programming.
Glasgow Author(s) Enlighten ID:Yeo, Dr Wee Meng
Authors: Yeo, W. M., and Yuan, X.-M.
College/School:College of Social Sciences > Adam Smith Business School > Management
Journal Name:European Journal of Operational Research
Journal Abbr.:EJOR
ISSN (Online):1872-6860
Published Online:14 November 2010

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