Heuristics for Base-Stock Levels in Multi-Echelon Distribution Networks with First-Come First Served Policies

36 Pages Posted: 19 Sep 2009 Last revised: 11 Jul 2014

Ying Rong

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Zumbul Atan

Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences

Lawrence V. Snyder

Lehigh University - Department of Industrial and Systems Engineering

Date Written: July 10, 2014

Abstract

We study inventory optimization for locally controlled, continuous-review distribution systems with stochastic customer demands. Each node follows a base-stock policy and 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 optimal 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 each location. The DA heuristic decomposes the distribution system into multiple serial systems, solves for the base-stock levels of these systems using the newsvendor heuristic of Shang and Song (2003), and then aggregates the serial systems back into the distribution system using a procedure we call ``backorder matching.'' A key advantage of the DA heuristic is that it does not require any evaluation of the cost function (a computationally costly operation that requires numerical convolution). We show that, for both RO and DA, changing some of the parameters, such as leadtime, unit backordering cost, and demand rate, of a location has an impact only on its own local base-stock level and its upstream locations' local base-stock levels. 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. Finally, we show that both RO and DA are asymptotically optimal along multiple dimensions for two-echelon distribution systems.

Keywords: Multi-Echelon Inventory Control; Distribution Network; One-Warehouse-Multiple-Retailer (OWMR); Serial Supply Chain; Heuristics

Suggested Citation

Rong, Ying and Atan, Zumbul and Snyder, Lawrence V., Heuristics for Base-Stock Levels in Multi-Echelon Distribution Networks with First-Come First Served Policies (July 10, 2014). Available at SSRN: https://ssrn.com/abstract=1475469 or http://dx.doi.org/10.2139/ssrn.1475469

Ying Rong (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Zumbul Atan

Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences ( email )

Den Dolech 2
Eindhoven
5600 MB Eindhoven
Netherlands

Lawrence V. Snyder

Lehigh University - Department of Industrial and Systems Engineering ( email )

Harold S. Mohler Laboratory
200 West Packer Avenue
Bethlehem, PA 18015-1582
United States

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