Determining Optimal Parameters for Expediting Policies

We consider an inventory policy that expedites delivery times of open orders if the inventory level drops below a certain threshold. By expediting open orders, back orders can be reduced. Order expediting is costly, and we include various types of expediting costs in the model. We prove structural properties of the model and show how the optimal parameters of the expediting policy can be computed efficiently. The expediting policy is easy to implement and, for situations with variable expediting cost only, the structure of the policy is optimal. For situations with nonvariable expediting costs, the expediting policy that we consider is generally not optimal. The optimal policy can be computed by dynamic programming, but this approach is computationally feasible only for small-problem instances. We conduct numerical experiments that are based on data from the service division of a global equipment manufacturer to evaluate the performances of the expediting policy and the optimal policy. The results show that substantial cost savings can be achieved by order expediting and that the expediting policy realizes a great share of the cost-saving potential offered by order expediting.