Inventory rationing in an (s, Q) inventory model with lost sales and two demand classes

Whenever demand for a single item can be categorised into classes of differ ent priority, an inventory rationing policy should be considered. In this p aper we analyse a continuous review (s, Q) model with lost sales and two de mand classes. A so-called critical level policy is applied to ration the in ventory among the two demand classes. With this policy, low-priority demand is rejected in anticipation of future high-priority demand whenever the in ventory level is at or below a prespecified critical level. For Poisson dem and and deterministic lead times, we present an exact formulation of the av erage inventory cost. A simple optimisation procedure is presented and in a numerical study we compare the optimal rationing policy with a policy wher e no distinction between the demand classes is made. The benefit of the rat ioning policy is investigated for various cases and the results show that s ignificant cost reductions can be obtained.