Augmenting the lot sizing order quantity when demand is probabilistic

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Abstract

In this paper we consider a single item, discrete time, lot sizing situation where demand is random and its parameters (e.g., mean and standard deviation) can change with time. For the appealing criterion of minimizing expected total relevant costs per unit time until the moment of the next replenishment we develop two heuristic ways of selecting an appropriate augmentation quantity beyond the expected total demand through to the planned (deterministic) time of the next replenishment. The results of a set of numerical experiments show that augmentation is important, particularly when orders occur frequently (i.e., the fixed cost of a replenishment is low relative to the costs of carrying one period of demand in stock) and the coefficient of variability of demand is relatively low, but also under other specified circumstances. The heuristic procedures are also shown to perform very favourably against a hindsight, baseline (s, S) policy, especially for larger levels of non-stationarity. © 2007 Elsevier B.V. All rights reserved.

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Pujawan, I. N., & Silver, E. A. (2008). Augmenting the lot sizing order quantity when demand is probabilistic. European Journal of Operational Research, 188(3), 705–722. https://doi.org/10.1016/j.ejor.2007.03.049

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