Determination of the optimal maximum issue quantity for lumpy demand items when controlled by an (s, S) policy

Abstract

In this paper, an effective algorithm is developed for the determination of the optimal maximum issue quantity for inventory items having lumpy demand patterns. In order not to disrupt the inventory system, a customer order with demand size exceeding the maximum issue quantity will be filtered out of the system and satisfied by placing a special replenishment order to a higher echelon. Otherwise, it will be met from stock. The control discipline is the (s, S) inventory policy with continuous review and the nature of the demands is approximated by a discrete compound Poisson distribution. The characteristics of the control parameters, s and S, and the cost function with respect to w are studied. The optimal values of the control parameters, w, s, and S, are determined jointly. The theoretical results are illustrated with a numerical example.