New Policies for the Stochastic Inventory Control Problem with Two Supply Sources

We study an inventory system under periodic review in the presence of two suppliers (or delivery modes). The emergency supplier has a shorter lead-time than the regular supplier, but the unit price he offers is higher. Excess demand is backlogged. We show that the classical “Lost Sales inventory problem” is a special case of this problem. Then, we generalize the recently studied class of Dual Index policies (Veeraraghavan and Scheller-Wolf (2007)) by proposing two classes of policies. The first class consists of policies that have an orderup-to structure for the emergency supplier. We provide analytical results that are useful for determining optimal or near-optimal policies within this class. This analysis and the policies that we propose leverage the connections we make between our problem and the lost sales problem. The second class consists of policies that have an order-up-to structure for the combined orders of the two suppliers. Here, we derive bounds on the optimal order quantity from the emergency supplier, in any period, and use these bounds for finding effective policies within this class. Finally, we undertake an elaborate computational investigation to compare the performance of the policies we propose with that of Dual Index policies. One of our policies provides an average cost-saving of 1.1 % over the Best Dual Index policy and has the same computational requirements. Another policy that we propose has a cost performance similar to the Best Dual Index policy but its computational requirements are lower. IOMS-OM Group, Stern School of Business, New York University, 44 W. 4th Street, Rooms 8-71/73/154, New York, NY 10012-1126.