Stock Positioning and Performance Estimation for Distribution Systems with Service Constraints

Abstract

The problem of minimizing average inventory costs in a distribution system consisting of one warehouse and multiple retailers subject to fill rate service constraints is studied. An effective algorithm to evaluate the optimal base-stock policy and cost under local control is provided. Properties of the optimal base-stock levels at each location are established. In addition, heuristics and closed-form approximations that yield insights into the drivers of system performance are also provided. An extensive numerical study to gain insight into the optimal solution, stock positioning and when to use the heuristics and approximations is presented. An example of how logistics postponement and fill-rate constraints affect the distribution system’s performance is quantified. A discussion on how to study and allocate stocks across an arborescence system with more than two echelons is presented.