Sensitivity Analysis for Base-Stock Levels in Multiechelon Production-Inventory Systems

Paul Glasserman and Sridhar Tayur
Additional contact information
Paul Glasserman: 403 Uris Hall, Columbia Business School, New York, New York 10027
Sridhar Tayur: GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Management Science, 1995, vol. 41, issue 2, 263-281

Abstract: Effective management of inventories in large-scale production and distribution systems requires methods for bringing model solutions closer to the complexities of real systems. Motivated by this need, we develop simulation-based methods for estimating sensitivities of inventory costs with respect to policy parameters. These sensitivity estimates are useful in adjusting optimal parameters predicted by a simplified model to complexities that can be incorporated in a simulation. We consider capacitated, multiechelon systems operating under base-stock policies and develop estimators of derivatives with respect to base-stock levels. We show that these estimates converge to the correct value for finite-horizon and infinite-horizon discounted and average cost criteria. Our methods are easy to implement and experiments suggest that they converge quickly. We illustrate their use by optimizing base-stock levels for a subsystem of the PC assembly and distribution system of a major computer manufacturer.

Keywords: capacitated inventory systems; optimal base-stock policies; assembly systems; simulation; derivative estimation; perturbation analysis (search for similar items in EconPapers)
Date: 1995
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:41:y:1995:i:2:p:263-281

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