Shortage Policies for a Jump Process with Positive and Negative Batch Arrivals in a Random Environment

Abstract

We study a continuous-review stock management of a retailer for a single item in a limited storage (buffer) in a random environment. The stock level fluctuates according to two independent compound Poisson processes with discrete amounts of items (batches) that enter and leave the storage facility. The storage facility is controlled by a three-parameter base-stock replenishment policy. All items exceeding the storage capacity are transferred to an unlimited foreign facility. In addition, a restricted backlogging possibility is permitted; additional demands for items are lost sales. We further assume a random shelf life, the possibility of total inventory collapse, and a random lead time. Applying Markov theory, we derive the optimal control parameters minimizing the long-run expected total cost. A sensitivity analysis is conducted focusing on the comparison between the pure lost-sales policy and a partial backordering policy. Accordingly, we identify cases where one policy is cost effective compared to the other, particularly with respect to the batch patterns (sign, rate, average, and variability), and the associated costs.

Keywords

• inventory
• batch arrival
• base-stock policy
• backlog
• lost sales