Dynamic inventory control model with flexible supply network

Abstract

In this paper, we consider the inventory problem of a firm facing disruption probability in its supply chain which consists of multiple suppliers and multiple demand nodes. The firm wishes to minimize its total expected cost in a finite time horizon setting. In order to manage the supply chain disruption, we introduce flexibility into the supply chain network of our inventory management problem. The problem is formulated as a Markov decision process, and a state-dependent optimal threshold policy is derived. We show that the expected cost function is monotonic in the convex ordering of the demand distribution and that the optimal policy can be characterized with the ratio of the ordering cost and the disruption probability of supply. We also numerically demonstrate that the flexibility of the supply chain network reduces the total expected cost.