Myopic control of stochastic inventories with intermittent updates: continuous versus periodic replenishment

Abstract

A manufacturer who is responsible for supplying a retailer with a single product is considered. The retailer sells the product in response to stochastic demand and provides the manufacturer with periodic updates about his inventories. Replenishing the retailer's inventory under two myopic base-stock policies is addressed. These policies, referred to as vendor managed inventory, represent a relatively new approach to allocating responsibility in the replenishment process. Specifically, the manufacturer, who is responsible for the retailer's inventories, can replenish them either continuously at any point in time or periodically, at one point in time for each period. The myopic replenishment policies that are considered are of a base-stock type. It is shown that the selected policies become optimal as the number of review periods tends to infinity. Furthermore, the two replenishment alternatives are compared in terms of both base-stock levels and expected costs, including those for inventory holding/shortage and transportation costs. Although continuous rather than periodic replenishment is evidently more expensive in terms of transportation costs, it is shown that even when the transportation cost constitutes more than 55% of the total average cost, it may still be preferable to replenish continuously rather than periodically.

Keywords:

• Myopic base-stock policy
• vendor managed inventory
• continuous replenishment
• periodic replenishment