Decentralized multiechelon inventory control

Decentralized multiechelon inventory control

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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: , ,
Keywords: multi-echelon system
Abstract:

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.

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