A Heuristic Technique For Inventory Replenishment Policy With Increasing Demand Pattern and Shortage Allowance

In the growth stage of a product life cycle, the demand rate is usually unstable and follows an increasing pattern. The traditional inventory policies, which have been developed for stationary demand pattern, are not appropriate to this situation. Although there exist some researches in the past dealing with inventory policy for the case of increasing demand pattern, most of them focused on the inventory systems in which shortages are not allowed. In reality, the presence of shortages is sometimes economically preferable when holding cost is significant as compared with shortage cost. The aim of the research presented in this paper is, therefore, to develop a replenishment policy for inventory systems with nonlinear increasing demand pattern and shortage allowance in such a way that the total demand during a predefined planning horizon can be exactly met. A heuristic technique to help determine the operational parameters for the inventory policy is then developed. In the proposed heuristic technique, the consecutive improvement method developed by Wang (ComputOper Res, 29:1819–1825, 2002) will first be used to help determine replenishment times. And then, a new concept of reduction cost, which is defined as the difference between the holding cost when shortage is allowed and the incurred shortage cost, is introduced and applied to help find the optimal shortage starting point in each replenishment cycle. Numerical experiments are also conducted to illustrate the applicability of the proposed technique