Inventory Rationing and Shipment Flexibility Alternatives for Direct Market Firms

Abstract

This paper investigates inventory-rationing policies of interest to firms operating in a direct market channel. We model a single product with two demand classes, where one class requests a lower order fulfillment lead time but pays a higher price. Demand for each class follows a Poisson process. Inventory is fed by a production system with exponentially distributed build times. We study rationing policies in which the firm either blocks or backlogs orders for the lower priority customers when inventory drops below a certain level. We compare the performance of these rationing policies with a pure first-come, first-serve policy under various scenarios for customer response to delay: lost sales, backlog, and a combination of lost sales and backlog. (DIRECT MARKET CHANNELS; SUPPLY CHAIN MANAGEMENT; MARKOV PROCESSES/ CHAINS; STOCHASTIC INVENTORY RATIONING MODELS)

Inventory rationing for a system with heterogeneous customer classes

“…So far, this policy has received little attention in the literature. It is one of several policies compared by Cattani and Souza (2002), who assume Poisson demand, and a single, exponential, replenishment server. They determine the parameters of the optimal policy through exhaustive search over a suitably large state space.…”

“…They determine the parameters of the optimal policy through exhaustive search over a suitably large state space. Compared to Cattani and Souza (2002), our replenishment system can operate either a single, several parallel, or an ample number of replenishment servers. We will focus on the ample server case as this captures practical settings we wish to model, and as the other cases are special (and easier) cases.…”

“…Furthermore we avoid enumeration over a suitably large state space by the development of bounds on the cost of a policy. Hence, Cattani and Souza (2002) can be thought of as containing a special case of our problem.…”

“…These types of problems have been studied under varying assumptions: (see e.g. Veinott 1965;Topkis 1968;Ha 1997a;Cattani and Souza 2002;Dekker et al 2002;De Véricourt et al 2002;Deshpande et al (2003b;Möllering and Thonemann 2008;Van Houtum 2007, 2008). An assumption common to this literature is that all customer classes behave similarly, i.e.…”

“…The online customers can be backlogged when inventory is low and still be considered satisfied, since they anticipated some lead time anyways. Cattani and Souza (2002), Swaminathan and Tayur (2003), and more recently, Duran et al (2008) identify the opportunity to differentiate between these types of customers. 3.…”