Experimental investigation of the inventory rationing policy

Abstract

Rationing of inventory gains recognition as a method to maximize profit in a few industries, for example the hotel management and airline industry. The classical application of inventory rationing is in the airline industry, with the inventory being the airline seats which is perishable, and the customers are differentiated in terms of the degree of service required by each customer. The concept of service differentiated demands can be extended to various other industries, with modification performed to cater for the uniqueness in each industry. A (r, Q, K) inventory rationing policy is proposed and investigated in this project. Periodic review of reorder point is performed. In the (r, Q, K) policy, there are rationing levels in the on-hand inventory level. The aim of this project is to obtain the optimum rationing levels, and with the rationing levels found, the same (r, Q, K) policy will be analyzed for different scenarios. The (r, Q, K) inventory rationing policy is modeled with ARENA simulation software. Output performance measures are the total cost which comprises of the ordering cost, inventory holding cost and backorder cost, and the service levels of the three classes of demand. Two backorders clearing mechanism are analyzed, which are the first-in-first-out clearing and the priority clearing. Optimum rationing levels are found through OptQuest in ARENA simulation software, with the reorder point and order quantity determined through the EOQ inventory model. Experiments are done to analyze the effect of backorders clearing policies, the comparison between rationing and without rationing, the inventory rationing policy with minimum service level requirement on the higher class of demand, varying demand arrivals of all three classes of demand as compared to constant demand arrivals, and the varying percentage of backorder cost of class two and class three demand upon backorder cost of demand of class one. The results show that the priority backorders clearing mechanism and the introduction of inventory rationing yield better performance. When there is increment in the service level requirement of highest class of demand, the demand arrivals of higher class and the percentage of backorder cost of demand of class two and class three, more cost is generally incurred though the affect on the service levels is not uniform.