Inventory control with a fixed cost and a piecewise linear convex cost

Ye Lu, Miao Song

Research output: Journal article publicationReview articleAcademic researchpeer-review

8 Citations (Scopus)

Abstract

This paper studies the optimal policy for a periodic-review inventory system in which the production costs consist of a fixed cost and a piecewise linear convex variable cost. Such a cost function can arise from alternate sources of supply or from the use of overtime production. We fully characterize the structure of the optimal policy for the single-period problem. For the multi-period problem, the optimal policy can have disconnected production regions and complicated optimal produce-up-to levels, which implies that implementation of the optimal policy may not be practical. Fortunately, careful investigation shows that the optimal policy has some interesting properties. The structure of the optimal policy outlined by these properties leads to a practical and close-to-optimal heuristic policy. In an extensive numerical study, the average gap is only 0.02% and the worst gap is 1.37%.
Original languageEnglish
Pages (from-to)1966-1984
Number of pages19
JournalProduction and Operations Management
Volume23
Issue number11
DOIs
Publication statusPublished - 1 Jan 2014
Externally publishedYes

Keywords

  • convex cost
  • fixed cost
  • heuristic policy
  • inventory control

ASJC Scopus subject areas

  • Industrial and Manufacturing Engineering
  • Management Science and Operations Research
  • Management of Technology and Innovation

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