Cost-effective control policies for multi-echelon distribution systems

In this paper we consider a divergent multi-echelon inventory system, e.g., a distribution system or a production system. At every stockpoint orders are placed periodically. The order arrives after a fixed lead time. At the end of each period linear costs may be incurred at each stockpoint for holding inventory. Also, linear penalty costs are incurred at the most downstream facilities for backorders. The objective is to minimise the expected holding and penalty costs per period. Diks & De Kok [1996a] developed a decomposition algorithm in order to determine the control parameters of a near cost-optimal replenishment policy. Since this algorithm cannot be applied on divergent multi-echelon systems in which at some stockpoints no value is added to the product (e.g. major parts of distribution systems), we developed an extension of the algorithm in order to deal with these systems as well. A simulation study of a divergent 3-echelon system reveals that this extended algorithm performs well. Keywords: Inventory, Allocation, Logistics