Stock allocation in a two-echelon distribution system controlled by (s, S) policies

Abstract

Stock allocation is an important decision in distribution systems, which determines how the on-hand inventory of an upstream stock is allocated to its immediate downstream stocks if their replenishment orders cannot be fulfilled completely. In the literature, almost all studies assume each stock in a distribution system is controlled by a base stock policy, although a real system may be controlled by (s, S) policies because of the existence of fixed ordering costs. In this paper, we study stock allocation in a real distribution system of Alibaba and propose two easy-to-implement Allocation-to-S methods that are more effective than three well-known rationing rules and a rationing rule currently used in Alibaba. For the 300 instances tested, one of the methods can reduce the expected cost per period by more than 1.5% and improve the service level by more than 1.3% on average with respect to the best of the four rules. In addition, a general procedure is provided to solve the imbalance problem of linear rationing rules which include the rules.