Periodic review (s, S) inventory model with permissible delay in payments

Abstract

This paper investigates the effect of permissible delay in payments on ordering policies in a periodic review (s, S) inventory model with stochastic demand. A new mathematical model is developed, which is an extension to that of Veinott and Wagner (Mngt Sci 1965; 11: 525) who applied renewal theory and stationary probabilistic analysis to determine the equivalent average cost per review period. The performance of the model is validated using a custom-built simulation programme. In addition, two distribution-free heuristic methods of reasonable accuracy develop approximate optimal policies for practical purposes based only on the mean and the standard deviation of the demand. Numerical examples are presented with results discussed.

Keywords:

• (s, S) policy
• periodic review
• permissible delay in payments/supplier credit
• stochastic demand
• service level
• simulation
• heuristicse

Acknowledgements

We are grateful to the two referees for their constructive comments and suggestions. BS Maddah thanks his current academic advisor, Dr Ebru Bish of Virginia Tech, for her support and encouragement while this work was being revised.