A deterministic demand inventory model with advance supply information

Abstract

In this study we consider a periodic review, single-item inventory model under non-stationary supply availability with advance supply availability information. We have a dynamic deterministic demand and the objective is to minimize expected cost, including fixed ordering cost, holding and backorder costs, over a finite planning horizon under supply constraints. Supply availability has a binomial structure such that supply is either fully available or completely unavailable. Firstly, the dynamic programming formulation of the model is given and the optimality of state dependent (s, S) policy is shown. A heuristic algorithm for finding a good ordering strategy, which is inspired by Silver-Meal Heuristic, is suggested. Then the model with no fixed ordering cost is analyzed. For this model it is shown that optimal policy is of order-up-to type and various properties of the optimal order-up-to levels are demonstrated. A one- pass algorithm that computes the optimal order-up-to levels over the planning horizon is found. Finally, numerical analysis is given including the value of advance supply information and important managerial insights are provided.