Multi-echelon inventory control: an adjusted normal demand model for implementation in practice

Abstract

This paper presents an approximation model for coordinated control of one-warehouse multiple-retailer inventory systems, where all locations use continuous review (R, nQ) policies. The motivation stems from close collaboration with a supply chain management software company, Syncron International, and one of their customers. A core objective has been to develop an accurate method for determining near-optimal reorder points that can be directly applied to real-life systems. The approach is based on decomposing the complex multi-echelon problem into N + 1 single-echelon problems, using a near-optimal-induced backorder cost at the central warehouse. Important extensions made compared to earlier work include the addition of procedures to adjust for lead-time variability, and for undershooting the reorder point when customers’ order sizes vary. The result is a flexible model that is computationally and conceptually simple enough to be implemented in practice. A numerical study, including real data from the case company, illustrates that the new model outperforms existing methods in the literature. Compared to the current methods used by the case company, it offers significant improvements in both service-level fulfilment and system-wide inventory holding costs. Implementations of the model into the Syncron software are in progress.