OPTIMAL CONTROL OF A FINITE-CAPACITY INVENTORY SYSTEM WITH SETUP COST AND LOST SALES

Baimei Yang; Yiqian Huang; Yifan Xu

doi:10.11948/2014009

2014 Volume 4 Issue 2

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Baimei Yang, Yiqian Huang, Yifan Xu. OPTIMAL CONTROL OF A FINITE-CAPACITY INVENTORY SYSTEM WITH SETUP COST AND LOST SALES[J]. Journal of Applied Analysis & Computation, 2014, 4(2): 197-220. doi: 10.11948/2014009

Citation:

Baimei Yang, Yiqian Huang, Yifan Xu. OPTIMAL CONTROL OF A FINITE-CAPACITY INVENTORY SYSTEM WITH SETUP COST AND LOST SALES[J]. Journal of Applied Analysis & Computation, 2014, 4(2): 197-220. doi: 10.11948/2014009

OPTIMAL CONTROL OF A FINITE-CAPACITY INVENTORY SYSTEM WITH SETUP COST AND LOST SALES

1 School of Business, Shanghai Dianji University, Shanghai, 201306, China;
2 School of Management, Fudan University, Shanghai, 200433, China

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Abstract

Abstract

One of the most fundamental results in inventory theory is the optimality of (s, S) policy for inventory systems with setup cost. This result is established based on a key assumption of infinite production/ordering capacity. Several studies have shown that, when there is a finite production/ordering capacity, the optimal policy for the inventory system is very complicated and indeed, only partial characterization for the optimal policy is possible. In this paper, we consider a continuous review inventory system with finite production/ordering capacity and setup cost, and show that the optimal control policy for this system has a very simple structure. We also develop efficient algorithms to compute the optimal control parameters.
- Inventory system /
- finite capacity /
- poisson demand /
- Markov decision process /
- lost sales
MSC: 90B05;93E20

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References

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