Article ID: | iaor200172 |
Country: | United States |
Volume: | 45 |
Issue: | 12 |
Start Page Number: | 1679 |
End Page Number: | 1696 |
Publication Date: | Dec 1999 |
Journal: | Management Science |
Authors: | Chen Fangruo |
Keywords: | demand, heuristics, stochastic processes |
A two-stage inventory system is considered where Poisson demand occurs at Stage 1, and Stage 1 replenishes its inventory from Stage 2, which in turn orders from an outside supplier with unlimited stock. Each shipment, either to Stage 2 or to Stage 1, incurs a fixed setup cost. Under the assumption that the supply leadtime at Stage 2 is zero, we characterize a simple heuristic policy whose long-run average cost is guaranteed to be within 6% of optimality, i.e., a 94%-effective policy. The paper also provides heuristic policies for more general inventory systems and reports computational results.