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Improving inventory system performance by selective purchasing of buyers’ willingness to wait

Improving inventory system performance by selective purchasing of buyers’ willingness to wait
Improving inventory system performance by selective purchasing of buyers’ willingness to wait
We develop a demand postponement mechanism to improve the performance of a single item, periodic review inventory system with advance demand. The focus in the literature has been on how to stimulate customers towards advance demand. Predicting how demand will shift can be problematic, however, and backorders may still occur. We focus on how a firm can address backorders under a given advance de- mand pattern by a mechanism of compensation from which both the firm and the customers will benefit: the firm may offer a discount to customers for accepting later deliveries at a promised delivery date. De- livery postponement offers are made selectively, i.e. in some periods and to some customers only when there is a benefit for the firm to do so. Customers may decline the offer, but then face the probability of a backorder. In each period, the firm has to decide whether to make delivery postponement offers and for how long, and whether to order from its supplier and how much. We formulate the problem as a Markov Decision Process and solve it by backward induction. Numerical examples illustrate the properties of the state-dependent policies obtained for both uncapacitated and capacitated inventory systems. The postponement mechanism in capacitated systems leads to policies that differ from the threshold policy identified as optimal in the literature. Overall, the approach shows promise to improve system performance more efficiently compared to strategies aiming to increase advance demand in the system.
Advance demand, Backward induction, Discount and replenishment policy, Inventory, Postponed demand
0377-2217
Alim, Muzaffer
bd468bf2-1294-4579-81eb-198717a8a086
Beullens, Patrick
893ad2e2-0617-47d6-910b-3d5f81964a9c
Alim, Muzaffer
bd468bf2-1294-4579-81eb-198717a8a086
Beullens, Patrick
893ad2e2-0617-47d6-910b-3d5f81964a9c

Alim, Muzaffer and Beullens, Patrick (2021) Improving inventory system performance by selective purchasing of buyers’ willingness to wait. European Journal of Operational Research. (doi:10.1016/j.ejor.2021.07.027).

Record type: Article

Abstract

We develop a demand postponement mechanism to improve the performance of a single item, periodic review inventory system with advance demand. The focus in the literature has been on how to stimulate customers towards advance demand. Predicting how demand will shift can be problematic, however, and backorders may still occur. We focus on how a firm can address backorders under a given advance de- mand pattern by a mechanism of compensation from which both the firm and the customers will benefit: the firm may offer a discount to customers for accepting later deliveries at a promised delivery date. De- livery postponement offers are made selectively, i.e. in some periods and to some customers only when there is a benefit for the firm to do so. Customers may decline the offer, but then face the probability of a backorder. In each period, the firm has to decide whether to make delivery postponement offers and for how long, and whether to order from its supplier and how much. We formulate the problem as a Markov Decision Process and solve it by backward induction. Numerical examples illustrate the properties of the state-dependent policies obtained for both uncapacitated and capacitated inventory systems. The postponement mechanism in capacitated systems leads to policies that differ from the threshold policy identified as optimal in the literature. Overall, the approach shows promise to improve system performance more efficiently compared to strategies aiming to increase advance demand in the system.

Text
Alim Beullens EJOR 2021 Accepted preprint - Accepted Manuscript
Restricted to Repository staff only until 18 July 2023.
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More information

Accepted/In Press date: 12 July 2021
e-pub ahead of print date: 18 July 2021
Keywords: Advance demand, Backward induction, Discount and replenishment policy, Inventory, Postponed demand

Identifiers

Local EPrints ID: 451668
URI: http://eprints.soton.ac.uk/id/eprint/451668
ISSN: 0377-2217
PURE UUID: 6178ee2a-c0ce-434c-8116-19973c53c1d8
ORCID for Patrick Beullens: ORCID iD orcid.org/0000-0001-6156-3550

Catalogue record

Date deposited: 19 Oct 2021 16:30
Last modified: 28 Apr 2022 02:00

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Contributors

Author: Muzaffer Alim

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