Fixed-interval joint-replenishment policies for distribution systems with multiple retailers and stochastic demand

Abstract

We consider a distribution system consisting of a central warehouse and a group of retailers facing independent stochastic demand. The retailers replenish from the warehouse, and the warehouse from an outside supplier with ample supply. Time is continuous. Most previous studies on inventory control policies for this system have considered stock-based batch-ordering policies. We develop a time-based joint-replenishment policy in this study. Let the warehouse set up a basic replenishment interval. The retailers are replenished through the warehouse in intervals that are integer multiples of the basic replenishment interval. No inventory is carried at the warehouse. We provide an exact evaluation of the long-term average system costs under the assumption that stock can be balanced among the retailers. The structural properties of the inventory system are characterized. We show that, although it is well known that stock-based inventory control policies dominate time-based inventory control policies at a single facility, this dominance does not hold for distribution systems with multiple retailers and stochastic demand. This is because the latter can provide a more efficient mechanism to streamline inventory flow and pool retailer demand, even though the former may be able to use more updated stock information to optimize system performance. The findings of the study provide insights about the key factors that drive the performance of a multiechelon inventory control system. (c) 2013 Wiley Periodicals, Inc. Naval Research Logistics 60: 637-651, 2013 (Less)