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94%-Effective Policies for a Two-Stage Serial Inventory System with Stochastic Demand

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  • Fangruo Chen

    (Graduate School of Business, Columbia University, New York, New York 10027)

Abstract

A two-stage inventory system is considered where Poisson demand occurs at Stage 1, and Stage 1 replenishes its inventory from Stage 2, which in turn orders from an outside supplier with unlimited stock. Each shipment, either to Stage 2 or to Stage 1, incurs a fixed setup cost. Under the assumption that the supply leadtime at Stage 2 is zero, we characterize a simple heuristic policy whose long-run average cost is guaranteed to be within 6% of optimality, i.e., a 94%-effective policy. The paper also provides heuristic policies for more general inventory systems and reports computational results.

Suggested Citation

  • Fangruo Chen, 1999. "94%-Effective Policies for a Two-Stage Serial Inventory System with Stochastic Demand," Management Science, INFORMS, vol. 45(12), pages 1679-1696, December.
    • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:12:p:1679-1696
    DOI: 10.1287/mnsc.45.12.1679
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    References listed on IDEAS

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