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Sensitivity Analysis for Base-Stock Levels in Multiechelon Production-Inventory Systems

Author

Listed:
  • Paul Glasserman

    (403 Uris Hall, Columbia Business School, New York, New York 10027)

  • Sridhar Tayur

    (GSIA, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Effective management of inventories in large-scale production and distribution systems requires methods for bringing model solutions closer to the complexities of real systems. Motivated by this need, we develop simulation-based methods for estimating sensitivities of inventory costs with respect to policy parameters. These sensitivity estimates are useful in adjusting optimal parameters predicted by a simplified model to complexities that can be incorporated in a simulation. We consider capacitated, multiechelon systems operating under base-stock policies and develop estimators of derivatives with respect to base-stock levels. We show that these estimates converge to the correct value for finite-horizon and infinite-horizon discounted and average cost criteria. Our methods are easy to implement and experiments suggest that they converge quickly. We illustrate their use by optimizing base-stock levels for a subsystem of the PC assembly and distribution system of a major computer manufacturer.

Suggested Citation

  • Paul Glasserman & Sridhar Tayur, 1995. "Sensitivity Analysis for Base-Stock Levels in Multiechelon Production-Inventory Systems," Management Science, INFORMS, vol. 41(2), pages 263-281, February.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:2:p:263-281
    DOI: 10.1287/mnsc.41.2.263
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