A hybrid inventory management system responding to regular demand and surge demand

• A hybrid inventory policy with regular and emergency orders is proposed to address surge demand.
• A solution method based on the level crossing method and mixed integer programming is presented.
• Numerical results clearly show the benefit of using this hybrid inventory model.
• The emergency reorder point becomes positive when the impact of a shortage is large.

This paper proposes a hybrid policy for a stochastic inventory system facing regular demand and surge demand. The combination of two different demand patterns can be observed in many areas, such as healthcare inventory and humanitarian supply chain management. The surge demand has a lower arrival rate but higher demand volume per arrival. The solution approach proposed in this paper incorporates the level crossing method and mixed integer programming technique to optimize the hybrid inventory policy with both regular orders and emergency orders. The level crossing method is applied to obtain the equilibrium distributions of inventory levels under a given policy. The model is further transformed into a mixed integer program to identify an optimal hybrid policy. A sensitivity analysis is conducted to investigate the impact of parameters on the optimal inventory policy and minimum cost. Numerical results clearly show the benefit of using the proposed hybrid inventory model. The model and solution approach could help healthcare providers or humanitarian logistics providers in managing their emergency supplies in responding to surge demands.