Title

A Note on Evaluating the Risk in Continuous Review Inventory Systems

Publication Type

Journal Article

Publication Date

7-2009

Abstract

This paper is an attempt to evaluate the long term risk of stock-out and obsolescence in continuous review inventory systems, typically of slow-moving but very critical items. Inventory decisions depend very much on the goodness of the estimates of the input parameters like the holding, ordering and stock-out costs. It is a well-known fact that stock-out cost is a very difficult parameter to estimate. The lower it is the lower the quality of service will be while the higher it is the higher the inventory cost would be and possibly higher obsolescence rate too. In this paper, we develop a framework to evaluate the risks, in the long term, of stock-out and obsolescence, especially for inventory of critical spares whose demand rate is not high. For this purpose, we propose the use of quasi-stationary distributions for continuous review (r, Q) inventory systems with the condition that the Laplace transforms of functions of interest are rational algebraic functions. We relate the quasi-stationary distribution to the conditional tail expectation which is a coherent risk measure used in finance and actuarial studies. Numerical illustration is also provided.

Keywords

Finance, Risk management, Conditional distribution, Distribution tail, Rational function, Laplace transformation, Stationary condition, Service quality, Obsolescence, Long term, Inventory control, Continuous inventory

Discipline

Operations and Supply Chain Management | Operations Research, Systems Engineering and Industrial Engineering

Research Areas

Operations Management

Publication

International Journal of Production Research

Volume

47

Issue

19

First Page

5543

Last Page

5558

ISSN

0020-7543

Identifier

10.1080/00207540802056081

Publisher

Taylor and Francis

Additional URL

http://dx.doi.org/10.1080/00207540802056081