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A Power-of-Two Ordering Policy for One-Warehouse Multiretailer Systems with Stochastic Demand

Author

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  • Leon Yang Chu

    (Marshall School of Business, University of Southern California, Los Angeles, California 90089)

  • Zuo-Jun Max Shen

    (Department of Industrial Engineering and Operations Research, University of California, Berkeley, California 94720)

Abstract

We study a two-echelon supply chain with one warehouse and N (nonidentical) retailers facing stochastic demand. An easy-to-implement inventory policy, the so-called power-of-two (POT) policy, is proposed to manage inventory for the system. To maintain a certain service level, safety stocks are kept at the warehouse and each retailer outlet to buffer random demand. Our analysis highlights the important role of the warehouse safety stock level, which, in addition to the length of the warehouse order interval, significantly affects the lengths of the retailers' order intervals. By combining the length of the warehouse order interval with the warehouse safety stock level, we introduce a plane partition method and develop a polynomial time algorithm to find a POT policy for arbitrary target service levels. The long-run average cost of the proposed POT policy is guaranteed to be no more than 1.26 times the optimal POT policy cost. We also show that our proposed policy can be computed in O ( N 3 ).

Suggested Citation

  • Leon Yang Chu & Zuo-Jun Max Shen, 2010. "A Power-of-Two Ordering Policy for One-Warehouse Multiretailer Systems with Stochastic Demand," Operations Research, INFORMS, vol. 58(2), pages 492-502, April.
    • Handle: RePEc:inm:oropre:v:58:y:2010:i:2:p:492-502
    DOI: 10.1287/opre.1090.0707
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    References listed on IDEAS

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    4. Nguyen, Christine & Dessouky, Maged & Toriello, Alejandro, 2014. "Consolidation strategies for the delivery of perishable products," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 69(C), pages 108-121.
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    6. Olof Stenius & Ayşe Gönül Karaarslan & Johan Marklund & A. G. de Kok, 2016. "Exact Analysis of Divergent Inventory Systems with Time-Based Shipment Consolidation and Compound Poisson Demand," Operations Research, INFORMS, vol. 64(4), pages 906-921, August.
    7. Wang, Qinan, 2013. "A periodic-review inventory control policy for a two-level supply chain with multiple retailers and stochastic demand," European Journal of Operational Research, Elsevier, vol. 230(1), pages 53-62.
    8. Mohd Kamarul Irwan Abdul Rahim & El-Houssaine Aghezzaf & Veronique Limère & Birger Raa, 2016. "Analysing the effectiveness of vendor-managed inventory in a single-warehouse, multiple-retailer system," International Journal of Systems Science, Taylor & Francis Journals, vol. 47(8), pages 1953-1965, June.
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