Abstract
We compare two inventory systems, one in which excess demand is lost and the other in which excess demand is back-ordered. Both systems are reviewed periodically. They experience the same sequence of identically and independently distributed random demands. Holding and shortage costs are considered. The holding cost parameter is identical; however, the cost of a lost sale could be different from the per-period cost of backlogging a unit sale. When these costs are equal, we prove that the optimal expected cost for managing the system with lost sales is lower. When the cost of a lost sale is greater, we establish a relationship between these parameters that ensures that the reverse inequality is true. These results are useful for designing inventory systems. We also introduce a new stochastic comparison technique in this paper.
Original language | English (US) |
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Pages (from-to) | 866-875 |
Number of pages | 10 |
Journal | Operations Research |
Volume | 55 |
Issue number | 5 |
DOIs | |
State | Published - Sep 2007 |
Externally published | Yes |
Keywords
- Inventory
- Production: stochastic
ASJC Scopus subject areas
- Computer Science Applications
- Management Science and Operations Research