A computationally efficient approach for determining inventory levels in acapacitated multiechelon production-distribution system

The system under study is a single item, two-echelon production-inventory s ystem consisting of a capacitated production facility, a central warehouse, and M regional distribution centers that satisfy stochastic demand. Our ob jective is to determine a system base-stock level which minimizes the long run average system cost per period. Central to the approach are (1) an inve ntory allocation model and associated convex cost function designed to allo cate a given amount of system inventory across locations, and (2) a charact erization of the amount of available system inventory using the inventory s hortfall random variable. An exact model must consider the possibility that inventories may be imbalanced in a given period. By assuming inventory imb alances cannot occur, we develop an approximation model from which we obtai n a lower bound on the per period expected cost. Through an extensive simul ation study, we analyze the quality of our approximation, which on average performed within 0.50% of the lower bound. (C) 2000 John Wiley & Sons, Inc.