# Two-Echelon System

## Abstract

Chapter 6 is devoted to a multi-item, two-echelon spare parts inventory system. The system consists of a central warehouse and multiple local warehouses, and there is a target for the aggregate mean waiting time per local warehouse. We describe an exact recursion for the evaluation of a given basestock policy, leading to an exact evaluation method, and we give approximate evaluation methods based on two-moment and one-moment fits, respectively. Next, we describe a greedy heuristic and the Dantzig-Wolfe heuristic, together with the Dantzig-Wolfe lower bound on the optimal total costs. Both heuristics can be combined with a local search, which gives four heuristics in total. The quality of the heuristics, all based on exact evaluations, is tested in a computational experiment. The greedy heuristic (without local search) performs most satisfactorily. It is accurate, easy to implement, and the computational requirements are limited. Its computational efficiency can be increased by using approximate evaluation based on two-moment fits. That results in a good feasible algorithm for real-life cases with many SKU’s and local warehouses.

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