Inventory Rationing Based on Different Shortage Cost: A Stable Inventory Demand Case

Abstract This paper discusses an inventory rationing system with a threshold in a relatively stable inventory demand environment. There are two different demand classes in this inventory system, prior demand and secondary demand, distinguished by different shortage cost. The inventory system functions as follow. When the inventory level is above the threshold, demands come from both classes are filled. Once the inventory level falls below the threshold, all demands come from secondary demand class are backordered, only prior demand would be served. Heuristic approach was used to solve the model in this paper, and the optimal order quantity, single inventory cycle time and inventory threshold were given. Compare between inventory system with and without inventory threshold shows the cost advantage of the first system. Sensitivity analysis was performed to give a better understanding of two crucial parameter, inventory threshold and cost saving rate.