A simulation-optimisation approach to determine optimal order-up-to level for inventory system with long lead time

This paper proposes a simulation-optimisation technique to determine an optimal order-up-to level for a single product in a periodic review inventory system. A vital aspect of the problem is that the replenishment lead time is much longer than the review period. Customer demands are stochastic, discrete, and intermittent, and the lead times are stochastic and discrete. With these demand and lead time characteristics, an empirical distribution is used to fit the distribution of demand during the lead time. A simulation-optimisation approach is developed with the objective to minimise the total annual inventory management cost, which consists of the holding cost and backlog cost, while maintaining an acceptable service level. Real data from a warehouse of an international trading company are used to test the performance of the proposed method. Results from a computational test show the method effectiveness.