A Single-Product Inventory Model for Multiple Demand Classes

Abstract

We consider a single-product inventory system that serves multiple demand classes, which differ in their shortage costs or service level requirements. We assume a critical-level control policy, and show the equivalence between this inventory system and a serial inventory system. Based on this equivalence, we develop a model for cost evaluation and optimization, under the assumptions of Poisson demand, deterministic replenishment lead-time, and a continuous-review (Q, R) policy with rationing. We propose a computationally-efficient heuristic and develop a bound on its performance. We provide a numerical experiment to show the effectiveness of the heuristic and the value from a rationing policy. Finally, we describe how to extend the model to permit service times, and to embed within a multi-echelon setting.