Asymptotic Optimality of Projected Inventory Level Policies for Lost Sales Inventory Systems with Large Leadtime and Penalty Cost

Abstract

We study the canonical periodic review lost sales inventory system with positive leadtime and independent and identically distributed (i.i.d.) demand under the average cost criterion. We demonstrate that the relative value function under the constant order policy satisfies the Wiener-Hopf equation. We employ ladder processes associated with a random walk featuring i.i.d. increments, to obtain an explicit solution for the relative value function. This solution can be expressed as a quadratic form and a term that grows sublinearly. Then we perform an approximate policy iteration step on the constant order policy and uniformly bound the gap relative to the otimal cost rate for large lead times. This leads to our main result that projected inventory level policies are asymptotically optimal as the leadtime grows when the cost of losing a sale is sufficiently large and demand has a finite second moment.