Structure of optimal solutions to periodic-review total-cost stochastic inventory control problems

This paper describes the structure of optimal policies for discounted periodic-review single-commodity total-cost inventory control problems with fixed ordering costs for finite and infinite horizons. There are known conditions in the literature for optimality of (s_t, S_t) policies for finite-horizon problems and the optimality of (s, S) policies for infinite-horizon problems. The results of this paper cover the situation, when such assumptions may not hold. This paper describes a parameter, which, together with the value of the discount factor and the horizon length, defines the structure of an optimal policy. For the infinite horizon, depending on the values of this parameter and the discount factor, an optimal policy either is an (s, S) policy or never orders inventory. For a finite horizon, depending on the values of this parameter, the discount factor, and the horizon length, there are three possible structures of an optimal policy: (i) it is an (s_t, S_t) policy, (ii) it is an (s_t, S_t) policy at earlier stages and then does not order inventory, or (iii) it never orders inventory. The paper also establishes continuity of the optimal value function and describes the optimal actions at states s_t and s.