Optimal Policies for a Capacitated Two-Echelon Inventory System

Authors:
Rodney P. Parker;Roman Kapuscinski
Affiliations:
Yale School of Management, New Haven, Connecticut 06520-8200;University of Michigan Business School, 701 Tappan Street, Ann Arbor, Michigan 48109-1234
Venue:
Operations Research
Year:
2004

Citing 13
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Abstract

This paper demonstrates optimal policies for capacitated serial multiechelon production/inventory systems. Extending the Clark and Scarf (1960) model to include installations with production capacity limits, we demonstrate that a modified echelon base-stock policy is optimal in a two-stage system when there is a smaller capacity at the downstream facility. This is shown by decomposing the dynamic programming value function into value functions dependent upon individual echelon stock variables. We show that the optimal structure holds for both stationary and nonstationary stochastic customer demand. Finite-horizon and infinite-horizon results are included under discounted-cost and average-cost criteria.