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- Title
POWER APPROXIMATION FOR COMPUTING (s, S) POLICIES USING SERVICE LEVEL.
- Authors
Schneider, Helmut; Ringuest, Jeffrey L.
- Abstract
The paper presents an analytic approximation for computing (s, S) policies for single items under periodic review with fixed ordering costs, linear holding costs and a service level requirement. The replenishment lead time is fixed and unfilled demand is backlogged. The approximation is similar to Ehrhardt's "Power Approximation." However, we do not assume the knowledge of shortage costs, which are difficult to estimate in practice. We define a gamma-service level which measures the average backlog relative to the average demand. This quantity is easy to understand and frequently used in practice. The resulting power approximation policies are easy to compute and require only knowledge of the mean and variance of demand. Computational results show that the approximation gives a gamma-service level which is within one percentage point of the required service level in most cases. Furthermore, the expected total costs of the approximation, taking into consideration a penalty cost for stockouts, are well within one percent of optimal.
- Subjects
INVENTORY accounting; INDUSTRIAL costs; APPROXIMATION theory; INVENTORY control; INVENTORY shortages; SUPPLY &; demand; CUSTOMER services; OVERHEAD costs; HOLDING cost; SERVICE level agreements; MANAGEMENT science
- Publication
Management Science, 1990, Vol 36, Issue 7, p822
- ISSN
0025-1909
- Publication type
Article
- DOI
10.1287/mnsc.36.7.822