We will extend the results of the last chapter in three ways. First, we will consider multistage systems. These systems are characterized by multiple locations where inventory management decisions have to be made. Recall that in the last chapter, there was only a single stage, that is, the ordering and inventory management decisions involved only one location. Second, we will work with the reorder interval as the decision variable over which cost is optimized instead of the order quantity. We continue to assume that demand occurs at a deterministic and stationary rate. Thus, once we know the reorder interval, we can easily determine the corresponding order quantity. Therefore, the two decision variables are equivalent; our preference for the reorder interval is due to practical reasons, as we explain below. Third, instead of determining the optimal solution, we will develop algorithms that determine reorder intervals that are easier to use in practice but are not necessarily optimal. However, we will establish that the worst possible cost will not be higher than the optimal cost by more than 6%. These inventory management policies that we will develop are referred to as power-of-two (PO2) policies.
KeywordsOrder Quantity Serial System Hold Cost Average Annual Cost Central Warehouse
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