A Two-Echelon Inventory System with a Minimum Order Quantity Requirement

Huaxiao Shen, Tian Tian and Han Zhu
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Huaxiao Shen: Business School, Sun Yat-sen University, Guangzhou 510275, China
Tian Tian: School of Management Science and Engineering, Dongbei University of Finance and Economics, Dalian 116025, China
Han Zhu: School of Management Science and Engineering, Dongbei University of Finance and Economics, Dalian 116025, China

Sustainability, 2019, vol. 11, issue 18, 1-22

Abstract: In this paper, we study a two-echelon inventory system with one warehouse and multiple retailers, under the setting of periodic review and infinite horizon. In each period, retailers replenish their stocks from the warehouse, and the warehouse in turn replenishes from an external supplier. Particularly, as stipulated by the supplier, there is a minimum order quantity (MOQ) requirement for the warehouse. That is, the warehouse must order either none or at least as much as the MOQ. To investigate this system analytically, we assume retailers adopt the base-stock policy, and we design for the warehouse a new heuristic ordering policy, called refined base-stock policy, which conforms to the MOQ requirement. Moreover, in the case of shortages, we assume the warehouse adopts a virtual allocation policy, and therefore the orders for individual units are filled in the same order as the original demands at the retailers. To evaluate the long-run average system cost exactly, we present a position-based cost-accounting scheme, in which the cost associated with each unit is assigned to its first position at the warehouse. We also derive lower and upper bounds of the inventory parameters, facilitating the search for the optimal policy that minimizes the long-run average system cost.

Keywords: inventory management; two-echelon inventory system; warehouse; minimum order quantity; analytical model; cost optimization (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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