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As a result of imperfect production and inspection by suppliers, pilferage, and/or damage in transit, it is common that procurement orders may contain defective items. This article deals with a continuous-review inventory system with Poisson demand arrivals and constant resupply time. Items in resupply lots may not be of perfect quality. The operating characteristics of such a system are analyzed. For purposes of computational savings, an approximation scheme for the operating characteristics is presented. As a result of the approximation, the determination of the optimal ordering policy becomes much simpler. Extensive numerical tests suggest that the approximation scheme is very effective in giving the optimal or near-optimal ordering policies for such a system.
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Moinzadeh et al. (1987) studied this question.
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