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A Continuous Review Inventory System with Lost Sales and Emergency Orders

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Document pages: 17 pages

Abstract: We analyze a continuous review lost sales inventory system with two types oforders—regular and emergency. The regular order has a stochastic lead timeand is placed with the cheapest acceptable supplier. The emergency order hasa deterministic lead time is placed with a local supplier who has a higherprice. The emergency order is not always filled since the supplier may nothave the ability to provide the order on an emergency basis at all times. Thisemergency order has a higher cost per item and has a known probability ofbeing filled. The total costs for this system are compared to a system withoutemergency placement of orders. This paper provides managers with a tool toassess when dual sourcing is cost optimal by comparing the single sourcingand dual sourcing models.

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