The Cost Function of a Two-Level Inventory System with identical retailers benefitting from Information Sharing

Abstract: This paper investigates a two-echelon inventory system with a central warehouse and N (N > 2) retailers managed by a centralized information-sharing mechanism. In particular, the paper mathematically models an easy-to-implement inventory control system that facilitates making use of information. Some assumptions of the paper include: a) constant delivery time for retailers and the central warehouse and b) Poisson demand with identical rates for retailers. The inventory policy comprises continuous review (R,Q)-policy on the part of retailers and triggering the system with m batches (of a given size Q) at the central warehouse. Besides, the central warehouse monitors retailers' inventory and may order batches sooner than retailers' reorder point, when their inventory position reaches R + s. An earlier study proposed the policy and its cost function approximation. This paper derives an exact mathematical model of the cost function for the aforementioned problem.