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A characterization of optimal base-stock levels for a continuous-stage serial supply chain

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  • Berling, Peter

    (Lund University)

  • Martinez de Albeniz, Victor

    ()
    (IESE Business School)

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    Abstract

    In this paper, we present a continuous model to optimize multi-echelon inventory management decisions under stochastic demand. Observing that in such continuous system it is never optimal to let orders cross, we decompose the general problem into a set of single-unit sub-problems that can be solved in a sequential fashion. When shipping and inventory holding costs are linear in the stage, we show that it is optimal to move the unit associated with the k-th next customer if and only if the inventory unit is held in an echelon located within a given interval. This optimal policy can be interpreted as an echelon base-stock policy such that the base-stock is initially increasing and then decreasing in the stage. We also characterize the optimal policy when costs are piecewise-constant. Finally, we study the sensitivity of the optimal base-stock levels to the cost structures.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/905.

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    Length: 35 pages
    Date of creation: 01 Feb 2011
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0905

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    Web page: http://www.iese.edu/
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    Related research

    Keywords: multi-echelon; optimal control; unit-tracking decomposition;

    This paper has been announced in the following NEP Reports:

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