Leveraging information in multi-echelon inventory systems

Decision-making in multi-echelon inventory systems is often facilitated by the availability of information. In this paper, we examine the effect of utilising demand information in a one-warehouse two-retailer system operating under periodic review. A common and fixed replenishment interval is assumed for all stages. The lead times are deterministic, and are small compared to the replenishment interval. The warehouse does not maintain any cycle stock, i.e., as soon as replenishment arrives at the warehouse, retailers' demands are fulfilled from the available stock. In the event of a shortage at the warehouse, two cases have been considered – emergency shipment and allocation. For both cases, expected total cost (ETC) models have been developed, and it has been shown through numerical examples that the optimal ETC in the presence of demand information is always lower than that in the absence of demand information. It is also noted that the order-up-to-level at the warehouse has to be dynamic to reap the benefits of availability of demand information.