Two-product inventory management with fixed costs and supply uncertainty |
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Authors: | Fatemeh Firouzi Enzo Baglieri Mohamad Y Jaber |
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Institution: | 1. Department of Business Administration, Università degli studi di Bergamo, via dei Caniana 2, 24127 Bergamo, Italy;2. SDA Bocconi School of Management, Operations and Technology Management Unit, via Bocconi, 8, 20136 Milan, Italy;3. Department of Mechanical and Industrial Engineering, Ryerson University, 350 Victoria Street, Toronto, ON M5B 2K3, Canada |
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Abstract: | This paper determines the optimal ordering policy for a two-product, periodic-review inventory problem in which the probability of supply availability is unknown. Moreover, there are two different fixed costs assigned to each product. Demand rates are random variables with known probability density functions, and the supply availability for each product is updated at the beginning of each time period. We prove the optimality of (s,S) policy with a monotone switching curve that indicates the priority of production, where the order-up-to levels and the reorder points are functions of supply availability information. A simple computation is proposed to calculate the two threshold levels. Bayesian updating helps to manage the optimal ordering policy by updating supply disruption information. Numerical results show that improving the accuracy of the forecast leads to making a better ordering decision and eliminating the negative effect of supply disruption on the total cost. |
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Keywords: | Supply uncertainty Dynamic programming Multi-product Bayesian updating |
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