94%-Effective Policies for a Two-Stage Serial Inventory System with Stochastic Demand

Fangruo Chen

Management Science, 1999, vol. 45, issue 12, 1679-1696

Abstract: A two-stage inventory system is considered where Poisson demand occurs at Stage 1, and Stage 1 replenishes its inventory from Stage 2, which in turn orders from an outside supplier with unlimited stock. Each shipment, either to Stage 2 or to Stage 1, incurs a fixed setup cost. Under the assumption that the supply leadtime at Stage 2 is zero, we characterize a simple heuristic policy whose long-run average cost is guaranteed to be within 6% of optimality, i.e., a 94%-effective policy. The paper also provides heuristic policies for more general inventory systems and reports computational results.

Keywords: multi-echelon inventory; stochastic demand; worst case analysis; heuristic policy (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (4)

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