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Old and New Methods for Lost-Sales Inventory Systems

Fuqua School of Business, Duke University, Durham, North Carolina 27708
paul.zipkin{at}duke.edu

We consider the notoriously difficult discrete-time inventory model with stochastic demands, a constant lead time, and lost sales. We show that the effective state space is a relatively manageable compact set. Then, we test various plausible heuristics. We find that several perform reasonably well, although none is perfect. However, the standard base-stock policy (a direct analogue of the optimal policy for a backlog system) performs badly. We also show that the optimal cost is increasing in the lead time.

Subject classifications: inventory; lost sales; dynamic programming.
History: Received May 2006; revision received March 2007; accepted April 2007.