This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via Google Scholar Google Scholar Articles by Janakiraman, G. Articles by Shanthikumar, J. G. Search for Related Content

A Comparison of the Optimal Costs of Two Canonical Inventory Systems

IOMS-OM Group, Stern School of Business, New York University, New York, New York 10012
IOMS-OM Group, Stern School of Business, New York University, New York, New York 10012
Department of Industrial Engineering and Operations Research, University of California, Berkeley, California 94720
gjanakir{at}stern.nyu.edu
sseshadr{at}stern.nyu.edu
shanthikumar{at}ieor.berkeley.edu

We compare two inventory systems, one in which excess demand is lost and the other in which excess demand is backordered. Both systems are reviewed periodically. They experience the same sequence of identically and independently distributed random demands. Holding and shortage costs are considered. The holding cost parameter is identical; however, the cost of a lost sale could be different from the per-period cost of backlogging a unit sale. When these costs are equal, we prove that the optimal expected cost for managing the system with lost sales is lower. When the cost of a lost sale is greater, we establish a relationship between these parameters that ensures that the reverse inequality is true. These results are useful for designing inventory systems. We also introduce a new stochastic comparison technique in this paper.

Subject classifications: inventory; production; stochastic.
History: Received January 2006; revision received August 2006; accepted September 2006.