Heuristics for Base-Stock Levels in Multi-Echelon Distribution Networks with First-Come First Served Policies
Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management
Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences
Lawrence V. Snyder
Lehigh University - Department of Industrial and Systems Engineering
November 1, 2012
We study inventory optimization for continuous-review distribution systems with Poisson customer demands under a first-come, first-served allocation policy. We develop two heuristics, the recursive optimization (RO) heuristic and the decomposition-aggregation (DA) heuristic, to approximate the base-stock levels of all the locations in the system. The RO heuristic applies a bottom-up approach that sequentially solves single-variable, convex problems for all locations. The DA heuristic decomposes the distribution system into multiple serial systems, solves for the base-stock levels of these systems using the newsvendor heuristic by Shang and Song (2003), and then aggregates the serial systems back into the distribution system using a procedure we call "backorder matching." One key advantage of the DA heuristic is that it does not require any evaluation of the cost function (a computationally costly operation). We show that, in the special case of one-warehouse, multiple-retailer systems, both the RO and the DA heuristics are asymptotically optimal as the warehouse holding cost approaches 0, and that RO is asymptotically optimal as the number of retailers approaches infinite. An extensive numerical study shows that both heuristics perform well, with the RO heuristic providing more accurate results and the DA heuristic consuming less computation time.
Number of Pages in PDF File: 29
Keywords: Multi-Echelon Inventory Control; Distribution Network; One-Warehouse-Multiple-Retailer (OWMR); Serial Supply Chain; Heuristicsworking papers series
Date posted: September 19, 2009 ; Last revised: November 7, 2012
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