Inventory rationing in an (s, Q) inventory model with lost sales a two demand classes

Whenever demand for a single item can be categorized into classes of different priority, an inventory rationing policy should beconsidered. In this paper we analyse a continuous review (s,Q) model with lost sales and two demand classes. A so-called critical level policy is applied to ration the inventory among the two demand classes. With this policy, low--priority demand is rejected in anticipation of future high--priority demand whenever the inventory level is at or below a prespecified critical level.For Poisson demand and deterministic lead times,we present an exact formulation of the average inventory cost. A simple optimization procedure is presented, and in a numerical study wecompare the optimal rationing policy with a policy where no distinction betweenthe demand classes is made. The benefit of the rationing policy is investigated for variouscases and the results show that significant cost reductions can be obtained.rationing;Inventory;lost sales;two demand classes