Distribution planning for a divergent 2-echelon network without intermediate stocks under service restrictions

In this paper we discuss a periodic review control policy for general N-echelon distribution networks without batch size or capacity constraints. Only stockpoints at the end of the network are allowed to hold stock, whereas the intermediate stockpoints act as pure distribution centers that allocate incoming goods immediately to downstream stockpoints. Larger distribution networks (N = 3,4, 5) are often encountered in practice and therefore suitable inventory management policies are needed. Instead of defining a cost structure, we apply a service level approach where the main goal is to realize predetermined target service levels in the final stockpoints. A fast and accurate approximation method is presented which enables us to compute the parameters of the control policy; i.e. the system order-up-to-level and the allocation fractions for the allocation policy at the intermediate stockpoints. Finally, some attention is given to the important phenomenon of imbalance, which is caused by highly fluctuating demand processes at the final stockpoints. This phenomenon can affect the service performance of the developed control policy significantly.