Continuous Review Inventory Model with Buffer Stock and Rush Orders

Abstract

The continuous review model is a widely used inventory management system in supply chains. It helps retailers and managers decide on the optimal quantity to order from the supplier(s), and the timing of the order. However, sometimes stock-outs occur and lead to loss of customer demand, which causes considerable financial losses. Ways to reduce shortages is to have a reserve stock or to utilize rush orders. In our research, we extend the traditional continuous review system to account for an additional buffer stock, at an external location, that aims to reduce shortages. This first model works on obtaining the optimal buffer stock level, in addition to the reordering point and the order size, in order to minimize losses and reduce the total cost. We also develop another model that relies mainly on the use of rush orders to reduce shortages whenever the regular inventory is depleted. The extended models are effective in determining the optimal policy for inventory management, and they both present a promising decrease in total cost compared to the classical model.