Continuous-Review Policies for a Multi-Echelon Inventory Problem with Stochastic Demand

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Abstract
This paper considers a multi-stage, serial inventory system. The demand for the end item is stochastic and stationary. The relevant costs include a fixed ordering cost and an echelon inventory holding cost for each stage, and a backordering cost for the end item. The objective is to find a continuous-review inventory control policy that minimizes the expected average costs. We present and analyze an approximate cost model. Our approximation is analogous to that for the traditional single-item, continuous-review inventory model that assumes a reorder-point, reorder-quantity policy. We obtain policies that are natural extensions to those for the single-item model.

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