Choosing Single-Item Service Objectives in a Multi-Item Base-Stock Inventory System.

This paper considers a multi-item, multi-period base-stock inventory system. The model differs from standard treatments in that shortage costs are replaced by stockout probability constraints to be satisfied in each period. The value of such a model is that it is often easier to express service objectives in terms of stockout probability constraints than it is to specify shortage costs. specifically, system service is defined in terms of a weighted average of single-item stockout probabilities. An optimal policy minimizes system costs while satisfying a constraint on system service. Necessary and sufficient conditions for a policy to be optimal are derived for the base-stock system, and a computationally efficient algorithm to find such a policy is developed for the special case of exponential demands and zero leadtimes. It is also shown by means of an example that operating costs can be reduced significantly when this model is used rather than the simpler uniform service model often used by managers. Author