Multi-echelon vs. single-echelon inventory control policies for low-demand items

Multi-echelon inventory systems are often controlled as a network of single-echelon inventory systems for simplicity of managerial authority, organizational control, and performance monitoring. This paper explores the amount of suboptimization in such a situation, using an actual demand data set provided by other researchers. The authors consider low-demand, high-cost items controlled on an (S-1,S) basis, with all warehouse stockouts met on an emergency-ordering basis. They demonstrate that the suboptimality penalty for this data set is 3% to 5% when single-echelon systems are appropriately parameterized.