Approximating Order-up-to Policies for Inventory Systems with Binomial Yield

Abstract

This paper studies an inventory policy for a retailer who orders his products from a supplier whose deliveries only partially satisfy the quality requirements. We model this situation by an innite-horizon periodic-review model with binomial random yield and positive lead time. We propose an orderup- to policy based on approximating the inventory model with unreliable supplier by a model with a reliable supplier and suitably modied demand distribution. The performance of the order-up-to policy is veried by comparing it with both the optimal policy and the safety stock policy proposed in Inderfurth & Vogelgesang (2013). Further, we extend our approximation to a dual-sourcing model with two suppliers: the rst slow and unreliable, and the other fast and fully reliable. Compared to the dual-index orderup- to policy for the model with full information on the yield, the proposed approximation gives promising results.