Article ID: | iaor2000662 |
Country: | United States |
Volume: | 7 |
Issue: | 4 |
Start Page Number: | 370 |
End Page Number: | 386 |
Publication Date: | Dec 1998 |
Journal: | Production and Operations Management |
Authors: | Axsater Sven, Andersson Jonas, Marklund Johan |
Keywords: | multi-echelon system |
This paper considers a model for decentralized control of an inventory system consisting of 1 central warehouse and a number of retailers. The cost structure includes holding costs at both echelons and shortage costs proportional to the time until delivery at the retailers. We analyze a procedure for coordinated but still decentralized control of the system. The procedure is based on a simple approximation, in which the stochastic lead times perceived by the retailers are replaced by their correct averages. The approximation enables us to decompose the considered multiechelon inventory problem into a number of single echelon problems, 1 for each installation. The information about how a certain decision at the warehouse affects the retailers is conveyed through the marginal cost increase with respect to a change of the expected lead time. This information about the retailer costs is used as a shortage cost at the warehouse. We show that a coordination procedure based on this information can be used for finding near-optimal reorder points for the system and provide bounds for the approximation errors.