Centralized inventory control in a two-level distribution system with Poisson demand

This paper introduces a new replenishment policy for inventory control in a two-level distribution system consisting of one central warehouse and an arbitrary number of nonidentical retailers. The new policy is designed to control the replenishment process at the central warehouse, using centralized information regarding the inventory positions and demand processes of all installations in the system. The retailers on the other hand are assumed to use continuous review (R, Q) policies. A technique for exact evaluation of the expected inventory holding and backorder costs for the system is presented. Numerical results indicate that there are cases when considerable savings can be made by using the new (α0, Q0) policy instead of a traditional echelon- or installation-stock (R, Q) policy.