An echelon inventory-based single-stage cost function for a two-station tandem system

We propose an alternative cost-accounting function for inventory control pr oblems on a make-to-stock setting. Our proposal is based on observing that the traditional holding and backlog parameters introduce some odd short ter m distortions on the inventory state space. Our single-stage cost function accounts for echelon inventories and possesses a pair of cost parameters fo r each echelon inventory variable, depending on whether it is positive or n egative. With the modified cost-accounting function, we study a two-station tandem s ystem producing a single product, and investigate how it compares with the performances obtained with the usual single-stage cost function. The result s available so far show that the optimal policies approach a multi-echelon base stock structure for each machine. Also, the service levels achieved ar e better under the modified function without increasing the levels of finis hed goods inventory.