Optimal Policies for Inventory Systems with Demand Cancellation

Abstract

An Inventory Network (IN), a logistics network focusing on inventory, comprises a set of inventories located in different regions connected via material flow, information flow, and cash flow. In practice, such network is commonly managed with its retailers to fulfill customers' demand via an advanced sales or reservation system. In practice, customers are often allowed to cancel their orders such as "money back guarantee". The majority of inventory models found in literature do not consider customers' cancellation despite being a commonly observed phenomenon. Ignoring cancellation can lead to the problems of over-estimating demands. Complicated and difficult to manage, such inventory system is becoming increasingly ubiquitous in today's globalized economy. The goal is to model inventory networks where the retailer faces demand uncertainties together with either an unreliable supplier, a capacitated supplier, or two simultaneous suppliers competing for procurement. The possibility of customers' cancellation is captured in these models where novel replenishment policies are analytically developed. The majority of industries appeal to the choice of "order-up-to" policy because of its simplicity. Our results show that such policy need not be optimal depending on suppliers' characteristics. Thus, our research offers a note of caution to guard against complacency in assuming that "order-up-to" is always optimal.