Policies for multi-echelon supply: decomposable requirements planning systems with probabilistic time-varying demands

This paper develops rolling planning horizon policies to manage material flows in multi-echelon supply–distribution networks with relatively general stochastic demand processes and procurement, transportation, inventory and shortage cost structures. Initially, the problem is formulated as a stochastic program with recourse, and its deterministic equivalent program is approximated by a multi-echelon lot-sizing model based on “risk inflated effective demands.” A dual relaxed problem (DRP) decomposition of this approximate model, which can be used with planning time fences or allocation algorithms, is then introduced. The use of expediting actions is also discussed. Finally, through a set of simulation experiments, the solutions obtained with our planning policies are compared with the solutions given by a classical DRP approach using safety stocks. The results show that the approach proposed leads to significant improvements.