Projected Inventory Level Policies for Lost Sales Inventory Systems: Asymptotic Optimality in Two Regimes

Abstract

We consider the canonical periodic review lost sales inventory system with positive lead-times and stochastic i.i.d. demand under the average cost criterion. We introduce a new policy that places orders such that the expected inventory level at the time of arrival of an order is at a fixed level and call it the Projected Inventory Level (PIL) policy. We prove that this policy has a cost-rate superior to the equivalent system where excess demand is back-ordered instead of lost and is therefore asymptotically optimal as the cost of losing a sale approaches infinity under mild distributional assumptions. We further show that this policy dominates the constant order policy for any finite lead-time and is therefore asymptotically optimal as the lead-time approaches infinity for the case of exponentially distributed demand per period. Numerical results show this policy also performs superior relative to other policies.