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94%-Effective policies for a two-stage serial inventory system with stochastic demand

Publication type: Journal article

Research Archive Topic: Operations, Risk Management

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.
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Citation

Chen, Fangruo. "94%-Effective policies for a two-stage serial inventory system with stochastic demand." Management Science 45, no. 12 (December 1999): 1679-1696.


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