Approximate order-up-to policies for inventory systems with binomial yield

This paper studies an inventory policy for a retailer who orders his products from a supplier whose deliveries only partially satisfy the quality requirements. We model this situation by an infinite-horizon periodic-review model with binomial random yield and positive lead time. We propose an order-up-to policy based on approximating the inventory model with unreliable supplier by a model with a reliable supplier and suitably modified demand distribution. The performance of the order-up-to policy is verified by comparing it with both the optimal policy and a safety stock policy proposed in the literature. Further, we extend our approximation to a dual sourcing model with one slow, unreliable and one fast, fully reliable supplier. Compared to the dual-index order-up-to policy for the model with full information on the yield, the proposed approximation gives promising results.