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Value of disruption information in an EOQ environment

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2014
Emer, Deniz Esin
Supply disruptions have important effects on supply chains causing serious financial and intangible damages. In this study, we consider an infinite horizon, continuous review inventory model with deterministic stationary demand where supply is subject to disruption. The supply process alternates between two states randomly: one in which it functions normally ("ON" period) and one in which it is disrupted ("OFF" period). Unsatisfied demand is backordered in off periods. In this setting we seek the value of disruption orders which can be placed at the beginning of OFF-periods with the same fixed cost. Utilizing renewal theory, we derive the total expected cost function and determine the cost minimizing regular order-up-to level and characterize the order-up-to level for disruption orders. We also conduct an extensive numerical analysis and compare the results with the model with no opportunity of disruption orders. We conclude that if the shortage cost is relatively high, placing disruption order always reduces or does not change the expected total cost and if disruption orders are placed then the regular order-up-to levels is generally so close to EQO with backorders.