Cost analysis of an (S-1,S) inventory system with two demand classes and rationing

In this paper we analyze a continuous review, lost sales (S-1,S) inventory system with two demand classes-high priority and low priority. We compare two different policies-one where the two classes of customers are treated exactly alike and the other where a threshold rationing policy is used. We prove that under certain conditions there is a sub-optimal rationing policy which yields a lower cost for the supplier and higher service levels for both the high priority and low priority customers than the optimal policy where the two customers are treated alike.