Optimizing Inventory Levels in a Two-Echelon Retailer System with Partial Lost Sales

Steven Nahmias and Stephen A. Smith
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Steven Nahmias: Decision and Information Sciences, Santa Clara University, Santa Clara, California 95053
Stephen A. Smith: Decision and Information Sciences, Santa Clara University, Santa Clara, California 95053

Management Science, 1994, vol. 40, issue 5, 582-596

Abstract: This paper considers a retailer inventory system with N first-echelon stores and a single second-echelon distribution center (DC). Customer demands at the stores are assumed to be random. When a stockout occurs, customers are willing to wait for their order to be filled with a known probability. Customers who are unwilling to wait result in lost sales. The first and second echelons are both restocked at fixed, equally spaced time points, where the store restocking frequency is an integer multiple of the DC restocking frequency. We also assume that replenishment quantities at both echelons can be adjusted up to the time of delivery, resulting in replenishment lead times equal to zero. This simplification allows us to determine optimal solutions for the partial lost sales case, which has proven intractable for two-echelon formulations with lead times. Computational results are given for illustrative examples.

Keywords: multi-echelon inventory system; lost sales; retailing; negative binomial distribution (search for similar items in EconPapers)
Date: 1994
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