Heuristics for handling direct upstream demand in two-echelon distribution inventory systems

This paper considers a two-echelon distribution inventory system with a central warehouse and a number of retailers. There is direct customer demand also at the warehouse. If this upstream demand requires a high service, it may be advantageous to give higher priority to customer orders compared to retailer replenishments. We suggest and evaluate techniques for handling this situation. One technique means that we have an extra separate stock point for the direct customer demand at the warehouse. Another technique means that we apply a so-called critical level policy at the warehouse, i.e., if the stock on hand at the warehouse is less than or equal to the critical level, retailer replenishments are backordered.