Institute of Electrical & Electronic Engineers
The authors study a feed-forward supply network that involves assembly operations. They compute optimal stock levels which minimize inventory costs and maintain stock-out probabilities below given desirable levels (service-level constraints). To that end, they develop large deviations approximations for inventory costs and service level constraints and formulate the stock level selection problem as a nonlinear programming problem which can be solved using standard techniques. This results in significant computational savings when compared to exhaustive search using simulation. Their distributional assumptions are general enough to include temporal dependencies in the demand and production processes. They leverage the solution of the inventory control problem in the design of supply contracts under explicit service-level constraints.