A PERIODIC-REVIEW INVENTORY SYSTEM WITH SUPPLY INTERRUPTIONS

Authors:
Zhaolin Li;Susan H. Xu;Jack Hayya
Affiliations:
Department of Supply Chain and Information Systems, The Smeal College of Business Administration, The Pennsylvania State University, University Park, PA 16802;Department of Supply Chain and Information Systems, The Smeal College of Business Administration, The Pennsylvania State University, University Park, PA 16802;Department of Supply Chain and Information Systems, The Smeal College of Business Administration, The Pennsylvania State University, University Park, PA 16802
Venue:
Probability in the Engineering and Informational Sciences
Year:
2004

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Abstract

Supply interruptions resulting from unpredictable events, such as machine breakdowns, order cancellations, unscheduled maintenance, and labor strikes can produce adverse effects on the production/inventory system. In this article, we consider a periodic-review inventory system subject to random demand and unreliable supply. The availability of supply is modeled as an alternating renewal process with general distributions for the durations of the UP and DOWN cycles. We consider the lost-sales case and also discuss the backorder case, for both the discounted and long-run average cost criteria. For the linear cost model, we derive the structural properties and bounds of the optimal policy. We also propose the “end-of-cycle” inventory return contract and show that it may be mutually beneficial to both the firm and the supplier.