Technical Note–A Simple Heuristic Policy for Stochastic Distribution Inventory Systems with Fixed Shipment Costs

Han Zhu (), Youhua (Frank) Chen (), Ming Hu () and Yi Yang ()
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Han Zhu: School of Management Science and Engineering, Dongbei University of Finance and Economics, Dalian, Liaoning 116025, China
Youhua (Frank) Chen: Department of Management Sciences, City University of Hong Kong, Kowloon Tong, Hong Kong
Ming Hu: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada
Yi Yang: School of Management, Zhejiang University, Hangzhou, Zhejiang 310027, China

Operations Research, 2021, vol. 69, issue 6, 1651-1659

Abstract: We study a continuous-review, two-echelon inventory system with one central warehouse, multiple local facilities, and each facility facing random demand. Local facilities replenish their stock from the central warehouse (or distribution center), which in turn places orders at an outside supplier with ample supply. Inventory replenishment at each location incurs a fixed-plus-variable cost for each shipment. The optimal policy remains unknown, and even if it exists, such a policy must be extremely complicated. Instead, we evaluate a class of easy-to-implement heuristics, called modified echelon ( r, Q ) policies. The parameters for such a heuristic are obtained by solving a set of independent single-stage systems. We show that the proposed policy is asymptotically optimal, as pairs of system primitives, such as the ratios of the fixed cost of the central facility to those of the local facilities, are scaled up. We also show that as the number of retailers grows, the performance bound of the heuristic converges to a primitive-dependent constant.

Keywords: multi-echelon; distribution system; stochastic demand; performance bound; ( r; Q ) policy (search for similar items in EconPapers)
Date: 2021
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