Finite horizon stochastic inventory problem with dual sourcing: Near myopic and heuristics bounds

We consider a class of multi-periodic non-stationary stochastic single-product inventory planning problems where two procurement modes can be used at each period: a first order with immediate delivery and a second order with a single-period delivery delay. Clearly, the slow delivery mode is less expensive than the fast. We develop a discounted backlog model, with non-stationary procurement, inventory holding and backlog penalty costs proportional to the ordered quantities, inventory levels and number of backlogged units respectively. The demands are defined as non-stationary and independent random variables. We partially characterize the optimal ordering policy structure and we develop theoretical bounds and heuristic approximations for this optimal policy. Efficiency of these approximations is illustrated via extensive numerical experiments.

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