Copyright © 2012 Wei-Min MA and Bing-Bing QIU. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Based on the mean and the standard deviation of lead time demand, and also taking the difficulty in measuring shortage cost into consideration, we investigate the joint decision problem of continuous review inventory in which a service level constraint should be satisfied. Under the assumption of controllable lead time and setup cost, a mathematical programming model is established. The objective function of the proposed model is the total expected annual cost and the constraint guarantees that the service level requirement can be satisfied at the worst case. Subsequently, an equivalent nonlinear programming model is derived. By constructing Lagrange function, the analysis regarding the solution procedure is conducted, and a solution algorithm is then provided. Moreover, a numerical example is introduced to illustrate the proposed model and solution algorithm. Through sensitivity analysis, some observations and managerial implications are provided.