Marginal Cost Analysis of Some Basic Ordering Policies for a Spare Unit and Extensions

The marginal cost approach has proved a useful economics-based alternative to the well known classical analysis of replacement models. In this paper, the marginal cost analysis' workings are explored for some basic ordering models for systems with a single spare unit. As with replacement models, the fundamental quantity of interest is the marginal cost function. While the basic pattern of analysis broadly corresponds to that for replacement models, the usual micro-type reasoning inherent in marginal cost analysis now has to be supplemented by some look-ahead considerations and a more detailed analysis. Moreover, the optimality equation derived here for ordering models is an extension of that for replacement models. Two kinds of objective functions are considered here: the long term expected cost rate function and the expected total discounted cost function. Several ordering policies are reviewed by way of the marginal cost approach, which, it is argued, is a viable and from the decision maker's perspective attractive tool of analysis also in the ordering context.