Managing a Hybrid RDC-DC Inventory System

Abstract

In this paper, we study a hybrid RDC-DC serial inventory system where the RDC replenishes its stock from an outside supplier, while the DC faces random demand and replenishes its stock from the RDC. However, unlike in the traditional serial system, the DC itself can replenish its inventory from the outside supplier as well. We propose two simple and easy-to-implement policies for the system. The first policy, which we call the three-index policy, combines the characteristics of the echelon-base-stock policy for the serial system (Clark and Scarf 1960) and the dual-index policy for the dual-sourcing system (Veeraraghavan and Scheller 2008). We show that the order-up-to level of the DC from the RDC can be computed by a newsboy fractile. A simulation-based optimization procedure for the policy is provided. We then develop another policy (the ALP policy) based on the three-index policy and the multimodularity of the problem proved by Sapra (2017). The policy applies the linear programming approach to approximately solve the value function of the dynamic programming formulation of the problem. Our numerical results show that both the three-index policy and the ALP policy are comparable to the policy computed via dynamic programming, and that the former performs slightly better. In addition, the outside supply option of the DC can draw considerable cost savings under both policies. We also conduct a numerical study with problem parameters calibrated by the actual data from a consumer goods company in China to glen insights on the management of the system.