Inventory rationing policy and backup supply with two classes of customers

Abstract

In this paper, we consider joint decisions on inventory rationing and replenishment from a regular supplier or a backup supplier with two classes of customers. When the on-hand inventory falls below a certain critical level, an inventory rationing policy is implemented to reject lower priority customers. We investigated the potential use of a backup supplier as a response to inventory rationing policy. First, we establish an inventory level transition equilibrium equation for the steady-state inventory level probability distributions and derive analytical steady-state performance indicators. Next, the inventory cost function and the nonlinear optimization model are characterized. We use real-coded genetic algorithm (RCGA) to search for the optimal joint decisions. Finally, the proposed algorithm and the joint decisions are investigated with different inventory service polices through numerical experiments. The results show that the inventory rationing policy (IRP) is superior to the traditional priority service policy (CPSP) and the common first-come-first service policy (FCFSP). The backup supply can reduce inventory costs with high arrival intensity.