Optimal base stock policies and truck capacity in a two-echelon system

With the recent trend toward just-in-time deliveries and reduction of inventories, many firms are reexamining their inventory and logistics policies. Some firms have dramatically altered their inventory, production, and shipping policies with the goal of reducing costs and improving service. Part of this restructuring may involve a specific contract with a trucking company, or it may entail establishing in-house shipping capabilities. This restructuring, however, raises new questions regarding the choice of optimal trucking capacity, shipping frequency, and inventory levels. In this study, the authors examine a two-level distribution system composed of a warehouse and a retailer. They assume that demand at the retailer is random. Since the warehouse has no advance notice of the size of the retailer order, inventory must be held there as well as at the retailer. The authors examine inventory policies at both the warehouse and the retailer, and they explicitly consider the trucking capacity, and the frequency of deliveries from the warehouse to the retailer. Both linear and concave fixed transportation costs are examined. The authors find the optimal base stock policies at both locations, the optimal in-ho