Approximate optimisation of a two-level distribution inventory system

A two-echelon distribution inventory system with a central warehouse and a number of retailers is considered. The retailers face stochastic demand. The system is controlled by continuous review installation stock (R, Q) policies with given batch quantities. There are linear holding costs at all locations and linear backorder costs at the retailers. We present a simple technique for approximate optimization of the reorder points. The technique means that we use normal approximations both for the retailer demand and the demand at the warehouse, i.e., the orders from the retailers.