On the stochastic inventory problem under order capacity constraints

Abstract: We consider the single-item single-stocking location stochastic inventory system under a fixed ordering cost component. A long-standing problem is that of determining the structure of the optimal control policy when this system is subject to order quantity capacity constraints; to date, only partial characterisations of the optimal policy have been discussed. An open question is whether a policy with a single continuous interval over which ordering is prescribed is optimal for this problem. Under the so-called "continuous order property" conjecture, we show that the optimal policy takes the modified multi-$(s,S)$ form. Moreover, we provide a numerical counterexample in which the continuous order property is violated, and hence show that a modified multi-$(s,S)$ policy is not optimal in general. However, in an extensive computational study, we show that instances violating the continuous order property are extremely rare in practice, and that the plans generated by a modified multi-$(s,S)$ policy can therefore be considered, for all practical purposes, optimal. Finally, we show that a modified $(s,S)$ policy also performs well in practice.