Heuristic Coordination of Decentralized Inventory Systems Using Induced Backorder Costs

Abstract

In this paper, we investigate a one‐warehouse multiple‐retailer system, where the inventory control decisions are coordinated using a near optimal induced backorder cost, β*. All installations use continuous review installation‐stock ( R, Q) policies. The analysis builds on an approximation model where the stochastic warehouse delays are replaced by their correct averages. The contributions include insights as to how β* is influenced by system parameters, and the determination of simple closed form β* estimates. The latter offering a practical means to achieve coordinated control of large size systems.