Cost-Effective Optimization on a Two Demand Classes Inventory System

Abstract

This paper investigates impact of change of priority on a continuous review inventory system with a mixture of backorders and lost sales. The inter-arrival processes are assumed to be exponentially distributed. The objective is to minimize the anticipated total cost rate by simultaneously optimizing the maximum inventory level and backorders. An entropy-based uncertainty metric for evaluating the operating performance is demonstrated. The proposed modification offers the practical value of establishing how the long-run cost rate is reduced. Various system performance measures are derived. Arrival rate of type-1(high priority) demands λ 2 KeywordsArrival rate of type-2(low priority) demands L(t)On-hand inventory level at time t φ i