A base period inventory policy for decentralized supply chains 05-04 Atul Rangarajan a, A. Ravi Ravindran a, aDept. of Industrial & Manufacturing Engineering, Pennsylvania State University 310 Leonhard Building, University Park, PA 16802, U.S.A. No part of this paper may be quoted or reproduced without the specific permission of the authors. Abstract This paper introduces an inventory policy called the Base Period policy for a decentralized supply chain with a single warehouse and multiple retailers. The policy requires that the retailers order once every base period or at integer multiples of the base period. Such a policy is more general and flexible than the Power-of-two policy for the retailers. A line search algorithm is used to determine the optimal order policies for the retailers. We analyze the performance of the policy and demonstrate the key role played by the choice of the base period length. We derive an upper bound on the error induced by following the proposed policy and demonstrate that a prudent choice for the base period length guarantees a solution within 94% of the optimal solution for the retailer problems. We prove that the proposed policy provides a better solution to the retailers compared to the power-of-two policy solution. The resulting warehouse problem is a non-stationary, non-nested, infinite horizon problem. We present a methodology that uses the base period policy structure to convert this into a finite-horizon problem which is then formulated and solved optimally as a Wagner-Whitin model. A numerical example is used to illustrate the model and the solution procedures.
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