Quantifying sustainable control of inventory systems with non-linear backorder costs

Abstract

Traditionally, when optimizing base-stock levels in spare parts inventory systems, it is common to base the decisions either on a linear shortage cost or on a certain target fill rate. However, in many practical settings the shortage cost is a non-linear function of the customer waiting time. In particular, there may exist contracts between the spare parts provider and the customer, where the provider is obliged to pay a fixed penalty fee if the spare part is not delivered within a certain time window. We consider a two-echelon inventory system with one central warehouse and multiple local sites. Focusing on spare parts products, we assume continuous review base stock policies. We first consider a fixed backorder cost whenever a customer’s time in backorder exceeds a prescribed time limit, second a general non-linear backorder cost as a function of the customer waiting time, and third a time window service constraint. We show from a sustainability perspective how our model may be used for evaluating the expected CO 2 emissions associated with not satisfying the customer demands on time. Finally, we generalize some known inventory models by deriving exact closed form expressions of inventory level distributions.