A joint replenishment policy with individual control and constant size orders

Abstract

We consider inventory systems with multiple items under stochastic demand and jointly incurred order setup costs. The problem is to determine the replenishment policy that minimises the total expected ordering, inventory holding, and backordering costs-the so-called stochastic joint replenishment problem. In particular, we study the settings in which order setup costs reflect the transportation costs and have a step-wise cost structure, each step corresponding to an additional transportation vehicle. For this setting, we propose a new policy that we call the (s, Q) policy, under which a replenishment order of constant size Q is triggered whenever the inventory position of one of the items drops to its reorder point s. The replenishment order is allocated to multiple items so that the inventory positions are equalised as much as possible. The policy is designed for settings in which backorder and setup costs are high, as it allows the items to independently trigger replenishment orders and fully exploits the economies of scale by consistently ordering the same quantity. A numerical study is conducted to show that the proposed (s, Q) policy outperforms the well-known (Q, S) policy when backorder costs are high and lead times are small.