A Simple Heuristic Policy for Stochastic Distribution Inventory Systems with Fixed Shipment Costs

27 Pages Posted: 23 Feb 2017 Last revised: 8 Sep 2020

See all articles by Han Zhu

Han Zhu

School of Management Science and Engineering, Dongbei University of Finance and Economics

Frank Chen

City Univ. of Hong Kong - Dept of Management Scienes; City University of Hong Kong - Dept of Management Sciences

Ming Hu

University of Toronto - Rotman School of Management

Yi Yang

School of Management, Zhejiang University

Date Written: May 21, 2020

Abstract

We study a continuous-review, two-echelon inventory system with one central warehouse, multiple local facilities, and each facility facing random demand. Local facilities replenish their stock from the central warehouse (or distribution center), which in turn places orders at an outside supplier with an ample supply. Inventory replenishment at each location incurs a fixed-plus-variable cost for each shipment. The optimal policy remains unknown, and even if it exists, such a policy must be extremely complicated. Instead, we evaluate a class of easy-to-implement heuristics, called modified echelon (r, Q) policies. The parameters for such a heuristic are obtained by solving a set of independent single-stage systems. We show that the proposed policy is asymptotically optimal, as pairs of system primitives, such as the ratios of the fixed cost of the central facility to those of the local facilities, are scaled up. We also show that as the number of retailers grows, the performance bound of the heuristic converges to a primitive-dependent constant.

Keywords: Multi-echelon, Distribution system, Stochastic demand, Performance evaluation, (r, Q) policy

Suggested Citation

Zhu, Han and Chen, Frank Y. and Hu, Ming and Yang, Yi, A Simple Heuristic Policy for Stochastic Distribution Inventory Systems with Fixed Shipment Costs (May 21, 2020). Rotman School of Management Working Paper No. 2921743, Available at SSRN: https://ssrn.com/abstract=2921743 or http://dx.doi.org/10.2139/ssrn.2921743

Han Zhu

School of Management Science and Engineering, Dongbei University of Finance and Economics ( email )

No. 217 Jianshan St.
Dalian, Liaoning 116025
China

Frank Y. Chen

City Univ. of Hong Kong - Dept of Management Scienes ( email )

Kowloon Tong
Hong Kong

City University of Hong Kong - Dept of Management Sciences ( email )

Kowloon Tong
Hong Kong

Ming Hu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Yi Yang

School of Management, Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

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