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Optimal Control of an Inventory with Simultaneous Obsolescence

Jeppesen, Englewood, Colorado 80112
Department of Mathematics, University of Colorado at Denver, Denver, Colorado 80217
markus.emsermann{at}jeppesen.com
burt.simon{at}cudenver.edu

We consider the problem of determining the optimal ordering and reordering policy for an inventory in which the entire stock will simultaneously become obsolete at some (typically random) future time. Many manufacturing, publishing, distribution, and high-tech businesses face the challenge of maintaining inventories that do not age in the conventional sense; instead, they suddenly become obsolete and lose most or all of their value. These circumstances render traditional inventory analysis unsuitable for balancing reordering costs with the costs of overstocking. We study a continuous-review and stochastic-demand obsolescence inventory model, and calculate its optimal control policy. We gear our solution technique to problems that involve large inventories and small holding costs.

Key Words: stochastic modeling; optimization; inventory management