Congruential Inventory Model for Two-Echelon Distribution Systems

Abstract

Large-scale inventory-distribution systems typically comprise a hierarchy of warehouses that stock goods for distribution to retailers at which demand for these goods originates. This paper develops an inventory model for two-echelon distribution systems under the assumption that the central warehouse and retailers order periodically. Characteristics of the optimal policy are described. An iterative solution procedure is presented to find optimal or near optimal operating-policy variables. Solutions of the model to a large number of test examples show that the model outperforms other existing models in the literature without sacrificing the computation time. Tested against the lower bounds on the optimal average annual variable cost obtained by removing some of the ordering costs, the solutions of the present model are found to be near optimal.