Decentralized inventory control in a two-level distribution system

Decentralized inventory control in a two-level distribution system

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Article ID: iaor20012340
Country: Netherlands
Volume: 127
Issue: 3
Start Page Number: 483
End Page Number: 506
Publication Date: Dec 2000
Journal: European Journal of Operational Research
Authors: ,
Keywords: inventory: order policies
Abstract:

We consider a model for decentralized inventory control in a two-level distribution system with one central warehouse and N non-identical retailers. All installations use continuous review installation stock (R,Q)-policies for replenishing their inventories. Our approach is based on an approximate cost evaluation technique, where the retailers replace their stochastic lead-times by correct averages. By introducing a modified cost-structure at the warehouse, the multi-level inventory control problem can be decomposed into N+1 single level sub-problems, one problem for each installation. The sub-problems are then solved in an iterative manner by a simple coordination procedure, which can be interpreted as a negotiation process. In the case of normally distributed demand we show that the procedure converges to a near optimal solution. To assess the quality of the involved approximation an upper bound for the relative cost increase of using the obtained solution is derived. We also provide a numerical study illustrating the performance of our approach.

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