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

Author

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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
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    File URL: http://dx.doi.org/10.1287/mnsc.45.12.1679
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    References listed on IDEAS

    as
    1. Fangruo Chen & Yu-Sheng Zheng, 1994. "Lower Bounds for Multi-Echelon Stochastic Inventory Systems," Management Science, INFORMS, vol. 40(11), pages 1426-1443, November.
    2. Andrew J. Clark & Herbert Scarf, 2004. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, pages 1782-1790.
    3. Marc A. De Bodt & Stephen C. Graves, 1985. "Continuous-Review Policies for a Multi-Echelon Inventory Problem with Stochastic Demand," Management Science, INFORMS, vol. 31(10), pages 1286-1299, October.
    4. Paul Zipkin, 1986. "Inventory Service-Level Measures: Convexity and Approximation," Management Science, INFORMS, vol. 32(8), pages 975-981, August.
    5. Andrew J. Clark & Herbert Scarf, 2004. "Optimal Policies for a Multi-Echelon Inventory Problem," Management Science, INFORMS, pages 1782-1790.
    6. Antony Svoronos & Paul Zipkin, 1991. "Evaluation of One-for-One Replenishment Policies for Multiechelon Inventory Systems," Management Science, INFORMS, vol. 37(1), pages 68-83, January.
    7. Fangruo Chen & Yu-Sheng Zheng, 1994. "Evaluating Echelon Stock (R, nQ) Policies in Serial Production/Inventory Systems with Stochastic Demand," Management Science, INFORMS, vol. 40(10), pages 1262-1275, October.
    8. Yu-Sheng Zheng, 1992. "On Properties of Stochastic Inventory Systems," Management Science, INFORMS, vol. 38(1), pages 87-103, January.
    9. Kamran Moinzadeh & Hau L. Lee, 1986. "Batch Size and Stocking Levels in Multi-Echelon Repairable Systems," Management Science, INFORMS, vol. 32(12), pages 1567-1581, December.
    10. Peter L. Jackson, 1988. "Stock Allocation in a Two-Echelon Distribution System Or "What to Do Until Your Ship Comes In"," Management Science, INFORMS, vol. 34(7), pages 880-895, July.
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    Cited by:

    1. Yang, Lei & Yang, Jian & Yu, Gang & Zhang, Hanqin, 2011. "Near-optimal (r,Q) policies for a two-stage serial inventory system with Poisson demand," International Journal of Production Economics, Elsevier, vol. 133(2), pages 728-735, October.
    2. Li, Xiuhui & Wang, Qinan, 2007. "Coordination mechanisms of supply chain systems," European Journal of Operational Research, Elsevier, vol. 179(1), pages 1-16, May.

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