Near-Optimal Echelon-Stock (R, nQ) Policies in Multistage Serial Systems

We study echelon-stock ( R , nQ ) policies in a multistage, serial inventory system with compound Poisson demand. We provide a simple method for determining near-optimal control parameters. This is achieved in two steps. First, we establish lower and upper bounds on the cost function by over- and un...

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Bibliographic Details
Published in:Operations research 1998-07, Vol.46 (4), p.592-602
Main Authors: Chen, Fangruo, Zheng, Yu-Sheng
Format: Article
Language:English
Subjects:
Applied sciences
Average cost
Average total cost
Carrying costs
Cost efficiency
Cost functions
Determinism
Exact sciences and technology
Heuristics
Integers
Inventories
Inventory control, production control. Distribution
Inventory/production
Investment policy
lot-sizing
multiechelon
Operational research and scientific management
Operational research. Management science
Operations research
Optimal solutions
Optimization
stochastic
Studies
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Summary:We study echelon-stock ( R , nQ ) policies in a multistage, serial inventory system with compound Poisson demand. We provide a simple method for determining near-optimal control parameters. This is achieved in two steps. First, we establish lower and upper bounds on the cost function by over- and under-charging a penalty cost to each upstream stage for holding inadequate stock. Second, we minimize the bounds, which are simple, separable functions of the control parameters, to obtain heuristic solutions. We also provide an algorithm that guarantees an optimal solution at the expense of additional computational effort. A numerical study suggests that the heuristic solutions are easy to compute (even for systems with many stages) and are close to optimal. It also suggests that a traditional approach for determining the order quantities can be seriously suboptimal. All the results can be easily extended to the discrete-time case with independent, identically distributed demands.
ISSN:0030-364X
1526-5463
DOI:10.1287/opre.46.4.592