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The impact of inventory information distortion due to customer order cancellations
Author(s) -
Cheung Ki Ling,
Zhang Alex X.
Publication year - 1999
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/(sici)1520-6750(199903)46:2<213::aid-nav6>3.0.co;2-4
Subject(s) - computer science , operations research , distortion (music) , mathematical optimization , markov chain , poisson distribution , total cost , set (abstract data type) , supply chain , lost sales , inventory control , mathematics , economics , telecommunications , statistics , business , amplifier , bandwidth (computing) , marketing , machine learning , programming language , microeconomics
In this paper we study the impact of cancellations of customer orders on an inventory system. We develop a periodic review ( s, S ) inventory model with Poisson demands, deterministic demand leadtimes and supply leadtimes. When no set up cost is present for replenishment, the behavior of the system cost can be studied analytically. For the case with a fixed set up cost, we derive the operating characteristics of the model via an embedded Markov chain analysis. Based on this, we formulate the total cost function and suggest a two‐phase approach to optimization. Our model can be used to compute cancellation fees and to evaluate the impacts of various conditions of cancellation. We find that cancellations, as major sources of inventory information distortion, increase total system costs, and the magnitude of the cost impact depends on the probability of cancellation and the expected cancellation time. Other relevant lessons and insights are also discussed. © 1999 John Wiley & Sons, Inc. Naval Research Logistics 46: 213–231, 1999