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Int. J. Production Economics 114 (2008) 119133 www.elsevier.com/locate/ijpe

Inventory/distribution control system in a one-warehouse/ multi-retailer supply chain

Chumpol Monthatipkula,1, Pisal Yenradeeb,
b

Graduate School of Management and Innovation, King Mongkuts University of Technology, Thonburi, Bangkok 10140, Thailand Industrial Engineering Program, Sirindhorn International Institute of Technology, Thammasat University, Pathum Thani 12121, Thailand Received 8 June 2005; accepted 24 December 2007 Available online 19 January 2008

Abstract This paper proposes a new inventory control system called the inventory/distribution plan (IDP) control system for a one-warehouse/multi-retailer supply chain. In the IDP control system, a proposed mixed-integer linear programming model is solved to determine an optimal IDP that controls the inventories of the supply chain. The efciency of the IDP control system is compared to that of the echelon-stock R,s,S control policy, where R is a periodic review interval, s is a reorder point, and S is an order-up-to level, at various ll rates. The experimental results show that when the system faces non-stationary demands, the IDP control system signicantly outperforms the echelon-stock R,s,S control system because it can give lower total costs for all ranges of ll rates. r 2008 Elsevier B.V. All rights reserved.
Keywords: Inventory/distribution plan; One-warehouse/multiple retailers; Supply chain; Mixed-integer linear programming

1. Introduction In Supply Chain Management (SCM), the inventory control problem is very complicated and challenging because the planner needs to consider several factors, for example, supply chain structures, coordination levels, and information sharing processes. The inventory control policy used by each entity is also an important factor because it affects the inventory replenishment process of the upstream entity. The upstream demand may be
Corresponding author. Tel.: +662 986 9009x2107; fax: +662 986 9112. E-mail addresses: chumpol.mon@kmutt.ac.th (C. Monthatipkul), pisal@siit.tu.ac.th (P. Yenradee). 1 Tel. +662 470 9783; fax: +662 470 9798.

distorted and far from the actual demand faced by the downstream entity. This phenomenon is known as the Bullwhip Effect, which is presented in Forrester (1961). Many classical inventory control systems (s,Q, s,S, R,S, R,Q, and R,s,S, etc. where s, Q, S, and R denote reorder points, reorder quantities, order-up-to levels, and periodic review periods, respectively) are still used in the supply chain environment. However, determination of their control parameters is very difcult. For SCM, all entities in the supply chain should be planned and controlled simultaneously to obtain good control parameters and low inventory costs. The aim of this paper is to develop a new inventory control system called the inventory/distribution plan (IDP) control system that determines optimal product ow through a one-warehouse/

0925-5273/$ - see front matter r 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.ijpe.2007.12.010

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multi-retailer supply chain under both stationary and non-stationary uncertain demand situations. The IDP control system controls each supply chain member using the optimal IDP operating under a one-period rolling horizon planning strategy. The optimal IDP is obtained by solving a proposed mixed-integer linear programming model. The performance of the proposed IDP control system is compared with that of the echelon-stock R,s,S control policy since both systems are similar in many aspects. The main contribution of this paper is the development of IDP control system that has good performances under both stationary and nonstationary uncertain demand situations. This paper also proposes a practical way to determine appropriate safety stock factors at the warehouse and retailers that yield relatively low total costs while maintaining relatively high ll rates. 1.1. Literature review This paper involves two main streams of research: (a) proposing new inventory control systems and (b) determining suitable control parameters of classical inventory control systems. Therefore, the literature review is presented in two main subsections. (a) Literature review proposing inventory control systems: So far, many researches including this paper have focused on proposing new inventory control systems or improving classical inventory control systems, and also comparing their proposed/improved systems to a classical inventory control system. Yoo et al. (1997) proposed an improved Distribution Resource Planning (DRP) method using concepts of installation-stock s,Q and R,S systems. The order quantities and order points are dynamically determined to meet the demand in a justin-time concept and minimize the out-of-stock probability. In the improved system, regional distribution centers can make a decision to reduce the related costsorder only the amount available or postpone the ordering. Based on experiments, the proposed system outperforms the classical DRP. Another relevant research work belongs to De Kok and Fransoo (2003). The authors proposed the socalled Synchronized Based Stock (SBS) policy and compared its performance to the LP-based system under the backlogging model. The SBS, which uses the base-stock-policy concept, raises

the inventory position to meet the adjustable target level in every inventory review. It is concluded that the SBS outperforms the LPbased system considerably because it uses more sophisticated ordering method and rationing rule. Ganeshan et al. (2001) studied two inventory control systems, namely, DRP and Reorder Point systems in a four-echelon network. The DRP system refers to a calculation of upstream reorder quantities and reorder intervals by aggregating all downstream demands and offsetting them by related lead times. The Reorder Point system refers to a situation that manufacturers forecast needs at the distribution centers. The authors concluded that the DRP system gives higher service levels and lower cycle times. A s,S system where s and S vary with states (SMART s,S system) was proposed by Giannoccaro and Pontrandolfo (2002). A three-stage serial supply chain is formulated as a semi-Markov decision process model and then solved by SMART (semi-Markov average reward technique) algorithm. The authors compared the SMART s,S system to the echelon-stock R,S system and then summarized that the SMART s,S system gives lower total costs and is more robust if demand undergoes only slight changes. Wang et al. (2004) proposed just-in-time distribution requirements planning (JIT-DRP) which aims to pull material through a multi-warehouse/multi-retailer supply chain effectively. The JIT-DRP gives optimal solutions under deterministic conditions. (b) Literature review determining suitable control parameters of classical systems: The classical inventory control system in supply chains can be broadly divided into two types, namely, installation-stock and echelon-stock inventory control systems. The difference between them is mainly based on information used to make an inventory replenishment decision. The echelonstock inventory control system allows the planner to utilize the network information, while the installation-stock control system allows the planner to use only local information. Details of the two categories can be seen in Axsater and Rosling (1994). Many research works try to determine control parameters of classical inventory control systems in supply chains. They aim to minimize

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the total costs including inventory costs (ordering, holding, and shortage costs) and transportation costs (transportation and in-transit holding costs). Schneider and Rinks (1991) and Schneider et al. (1995) provided a good approximation for parameter setting for the echelon-stock R,s,S control policy. The model is developed based on the backlogging model of a one-warehouse multiple-stores supply chain. Ganeshan (1999) studied a non-linear programming model which accounts for inventory and transportation costs. Solving the model by the Newton or the conjugate gradient method, the planner obtains near-optimal control parameters of the installation-stock s,Q system. Abdul-Jabar et al. (2003) studied inventory control systems of a one-warehouse/N-retailer network under centralized and decentralized policies. The authors obtained inventory control parameters (replenishment times and reorder quantities) by solving various types of mathematical models concerning holding and ordering costs. Another determination of control parameters on a one-warehouse/N-retailer network belongs to Axsater (2003). The author proposed a technique to approximate optimal reorder points. The model considers holding costs at all locations and backorder costs at retailers. Yokoyama (2002) studied a multiDC/multi-Retailer model controlled by the installation-stock R,S system. The target inventory and the transportation amount are determined so as to minimize the sum of transportation, holding, and shortage costs. Tagaras (1999) considered the installationstock R,S system in a one-warehouse/N-retailer network. Order-up-to quantities are calculated by solving a mathematical model concerning holding, shortage, and transshipment costs, if the transshipment between retailers is allowed. Optimal stock levels in general divergent networks under the echelon-stock R,S system was studied by Heijden (2000). The objective is to achieve target ll rates and to minimize total holding costs of the entire networks. Recently, control parameters of the traditional R,S system for serial supply chains were improved by Xie et al. (2006). The authors propose a two-level supply chain coordination algorithm to adjust the values of R and S, which are regularly determined by the local optimization. Some numerical experiments

have been conducted and it is found that the supply chain performance is increased due to the new values of R and S. Al-Rifai and Rossetti (2007) proposed an efcient heuristic optimization algorithm to determine the control parameters of the s,Q system. Their model is a one-warehouse/multi-retailer supply chain. The goal is to minimize the inventory investment that is affected by average annual ordering frequency and expected number of backorders. The continuous review s,Q policy were also studied by Seifbarghy and Akbari Jokar (2006). The authors study a onecentral-warehouse/multi-identical-retailer supply chain, which faces independent Poisson demands. When the batch size is given, the related reorder point at each facility is determined by a proposed approximate cost function. The remainder of this paper is organized as follows. Section 2 describes a supply chain model. The IDP control system and safety stock policies are presented in Sections 3 and 4, respectively. Section 5 contains the echelon-stock R,s,S control system and an approach to determine its control parameters. The experimental design is shown in Section 6. Section 7 discusses the experimental results. Finally, the results are concluded in Section 8. 2. A supply chain model A supply chain under consideration comprises of one-warehouse and multiple identical retailers as depicted in Fig. 1. It faces uncertain demand of a single product. When the demand is not satised, it is considered as a lost sale. The retailers replenish their inventories from the central warehouse, which in turn replenishes its inventory from an incapacitated vendor outside the concerned supply chain. It

Warehouse Retailers
Fig. 1. Supply chain model.

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is assumed that all storage and transportation capacities are unlimited. Transportation occurs after orders have been placed from the destination. Lateral transshipments between retailers are not allowed. The related costs are ordering, holding, intransit holding, transportation, and lost-sale costs. If insufcient products are sent to fulll customer demands, the system would have low ll rate and high lost-sale cost. In contrast, if excessive products are sent instead, the system would have high holding cost. Moreover, place and time of delivery also affect the system ll rate and total cost. Sending products to a wrong place in an inappropriate period may result in both low ll rate and high cost. Thus, it is interesting to optimize the product ow through the concerned supply chain, such that the system can give the desired ll rate with the lowest total cost. Therefore, the relevant decision in this model is the determination of shipping quantity sent from the warehouse to each retailer in each period. In this paper, the concerned supply chain is controlled by the IDP which is obtained by solving the proposed mixed-integer linear programming model presented in the next section. 3. The IDP control system The IDP model is formulated as a mixed-integer linear programming model. It aims to minimize the sum of ordering, holding, holding in transit, transportation, and lost-sale costs. The constraints are safety stock policies and material balance equations. Notations are dened as follows: Indices t period index (1,y,T) i node index (0,y,N), Note that the warehouse has index i 0, the retailer has index i40. Decision variables Tt shipping quantity sent from a source node i to node i at the beginning of period t Bt binary variable representing whether an i order is placed by node i in period t ki safety stock factor at node i Auxiliary variables IBt beginning inventory at node i in period t i IEt ending inventory at node i in period t i

LSt i

lost-sale quantity at node i at the end of period t (note that lost sales may occur at the retailers, but not at the warehouse)

Parameters M a large positive number Ai xed ordering cost at node i hi holding cost per unit period at node i hiti per period unit holding cost in transit from a source node to node i gi unit transportation cost from a source node to node i slt unit lost-sale cost at node i in period t i dt mean customer demand of the product at i node i in period t (note that customer demand occurs only at the retailers, but not at the warehouse) st standard deviation of demand over the lead i time plus the review period at node i in period t Li constant transportation lead time for transportation to node i IEt0 initial inventory at node i i Objective function The objective function is to minimize the total expected cost comprising of ordering cost, holding cost at the warehouse/retailers, holding cost in transit, transportation cost, and lost-sale cost. XX Ai Bt Minimize total expected cost i X
t

hi0 IEt i0

XX
t i40

hi fIBt i

IEt =2g i XX
t i

XX
t i

hiti Li T t i

XX
t i

gi T t i

slt LSt . i i (1)

The rst term in Eq. (1) is the ordering cost. The ordering cost is obtained from the multiplication of ordering cost Ai and binary variable Bt . The second i and third terms express the holding costs at both stages. At the warehouse (i 0), the holding cost is calculated based on the ending inventory because the inventory reduces at the beginning of a period and remains constant during the period. At the retailers (i40), it is calculated from the average of beginning and ending inventories because the inventory reduces due to the arrival of customers which may occur any time during the period. The fourth term is the holding cost in transit. The fth term is the transportation cost and the last term represents the lost-sale cost.

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Constraints 1. Safety stock policy constraints: The ending inventory at each node must not be lower than the required safety stock level as presented in constraint (2) IEt Xki st i i 8t; i. (2) It is noted that the safety stock factor ki is a decision variable. It is determined by a simulation-search approach as presented in Section 4. The safety stock factor ki is very important because it has a large effect on system performance. An inappropriate number of ki can result in poor system performance (low system ll rate with high system cost). 2. Inventory balance constraints: The beginning inventory level is equal to the ending inventory level of last period plus the total incoming quantity. The ending inventory level is equal to the beginning inventory level minus the total outgoing quantity IBt i IEit1 T tLi i 8t; i, (3)

cost. In practice, the actual demand might be different from the mean value. The shortage and excess of inventories may occur, which can result in unforeseen lost sales and inventory holding costs. Consequently, the actual amount of inventories and transportation in the real system may differ from the related quantities in the IDP. In this paper, the one-period rolling horizon planning strategy is adopted. In this case, the planning horizon is divided into a certain number of planning periods. The optimal plan for the rst period is used for controlling the operations of the supply chain, and at the end of the rst period, the state of the system is updated and the planning is repeated with the horizon advanced by one period. More explanations of the one-period rolling planning strategy can be seen in Jung et al. (2004). 4. Safety stock policy The optimal IDP will suggest the planner to send products to destinations to satisfy the customer requirements and safety stock amount. In this paper, there are two stages in which the optimal plan must suggest the safety stocks. Thus, the safety stock policy is denoted by [K1,K2], where K1 and K2 represent the safety stock parameters at the warehouse and retailers, respectively (K1 ki0 and K2 ki , where i40). Since it is assumed that all retailers are identical, the ki values are the same among all retailers (i40). The safety stock is kept to protect against the demand uncertainty. Thus, it is related to the system ll rate. The system can give the desired ll rate if suitable safety stock amount is kept at the right place. Thus, the determination of the most suitable safety stock policy, which can give the required system ll rate and minimum total cost, is a major issue of using the IDP control system. In this paper, the most suitable safety factor policy is determined by searching the safety stock policy [K1,K2] which can give the desired ll rate and the lowest total cost. The searching process is operated as follows. Set K1 in a range from 0 to 3.0 with a step size of 0.1 (0; 0:1; 0:2; . . . ; 3:0). For each value of K1, search for the value of K2 (using the same range as K1) which gives the desired ll rate and the lowest total cost using a simulation experiment (see Section 6). To save computation time, the step size in the searching process may not be too small. In this paper, the step of 0.1 is used.

8t; i, (4) P t where TOQ i40 T i at the warehouse, TOQ d t LSt at the retailers. i i 3. Fixed cost constraint: Since transportation occurs after an order has been placed from a destination to its source, the xed ordering cost is always incurred when transportation occurs. Hence, the binary variable Bt equals 1 if the i transportation amount T t is not zero i MBt XT t i i 8t; i. (5)

IEt IBt TOQ i i

4. Non-negativity and binary conditions: T t ; IBt ; IEt ; LSt X0 8t; i, i i i i Bt is binary i 8t; i. (6) (7)

The proposed mathematical model is linear and can be solved to optimality. Solving the model, the planner obtains the optimal IDP describing the optimal transportation amount and optimal inventory level at each node in each period. Since mean values of the stochastic variables (demand per period and per retailer) are entered into the MILP model, following the IDP may not result in the real minimum total

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5. The echelon-stock R,s,S control system The effectiveness of the IDP control system will be evaluated against a classical periodic review system. The IDP control system can be viewed as a periodic review system where the review period R is one period because the optimal IDP is regenerated every period. The order size of the IDP control system is variable depending on the recommendation from the optimal IDP. The IDP control system utilizes the network information rather than local information. Thus, a classical inventory control system which is similar to the IDP control system is the echelon-stock R,s,S control policy (where R 1). This control policy is thoroughly described in Whybark and Yang (1996). The brief explanation is provided as follows. The system is reviewed every period. If the inventory position is at or below s, an order is placed to bring the inventory position up to the level S; otherwise, nothing is done until the next review. The retailer inventory position is dened as on-hand inventory plus inventory in-transit from the warehouse to the retailer. The warehouse inventory position is the sum of on-hand inventory and inventory in-transit from a vendor plus all downstream inventories including pipeline inventories. If all retailer orders cannot be fullled by the on-hand inventory at warehouse at any period, the available inventory at the warehouse will be rationed so as to maximize the minimum inventory position among all retailers (see Whybark and Yang, 1996). Unfortunately, an exact method to determine the optimal control parameters of the echelon-stock R,s,S control policy for a lost-sale model is not known in the literature. A good approximate method can be found in Schneider and Rinks (1991) and Schneider et al. (1995). Even though Schneider and Rinks (1991) and Schneider et al. (1995) provide a good approximation for parameter setting for the echelon-stock R,s,S control policy, their model is developed based on the backlogging model and the authors have not guaranteed the adaptation of their model to the lost-sale model as studied in this paper. Thus, in this paper, the method of Schneider and Rinks (1991) and Schneider et al. (1995) is used to determine the initial values of the control parameters s and S. Then, simulation experiments are conducted to manipulate the values of s and S until the best ones are obtainedthe R value is xed to one, s and S are manipulated until the required ll rate is obtained while other parameters are kept constant.

Even though there are many sets of s and S which can give the same value of desired ll rate, the one which can give minimum total cost is selected. 6. Experimental design This section explains simulation experiments to investigate the effectiveness of the IDP control system. The experiments are divided into three parts as follows: 1. Study on effects of safety stock factor ki of IDP control system: As discussed in Section 4, the safety stock factor ki inuences the effectiveness of the IDP control system. This subsection is devoted to investigate the role of ki in terms of safety stock policy [K1,K2]. The values of K1 and K2 will be varied and the effects on ll rates and total costs will be analyzed. 2. Comparison between the IDP and R,s,S control systems: The effectiveness of the IDP control system is evaluated against the echelon-stock R,s,S control system. The best results obtained from both control systems are statistically compared. It is noted that when the echelonstock R,s,S control system is used and the supply chain faces non-stationary demand, a method presented in Appendix A is used to determine the control parameters. The initial inventory at each node is set equal to the associated order-up-to level S. 3. Study on effects of cost structures of the supply chain: It is possible that the relative magnitude of cost structures of the supply chain may affect the above-mentioned analyses. Therefore, the cost structure is changed by increasing the unit lost-sale cost by 20100% while other cost parameters (ordering, holding, and transportation costs) are kept constant. 6.1. Details of experiments The simulation experiment is run to cover 4 weeks (28 daily periods) using Ms-Visual Basic 6.0 code. The rst week is a warm-up period. The related costs and ll rates at the retailers are recorded from the second week to the fourth week. The simulation is run in many replications until the 95% condence intervals of the interesting parameters (ll rates and the total costs) do not exceed 2% of their means. All related parameters as presented in Table 1 are entered to the IDP model and the optimal IDP is

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generated using LINGO 8.0 to cover a 7-period planning horizon. The optimal IDP is regenerated once every period (the optimal IDP is rolled every period) and then transferred to the Ms-Visual Basic 6.0 code to perform the simulation. Table 2 shows an example of the optimal IDP. The planning horizon should be long enough so that the optimal plan contains at least two inventory replenishments at each node.
Table 1 Related parameters of supply chains Parameters Price v M Ai 0 Ai, i40 hi 0 hi, i40 hiti 8i gi 8i slt 8i; t i Li 8i Value 50 Baht 1,000,000 20 Baht Rnd(1020) Bahta 0.375% of v Rnd(0.31.2%) of v 150% of hi Rnd(0.30.9%) of v 50% of v 1 period

The customer demand is assumed to follow Poisson distributions. The associated standard deviations of demand at the retailers and warehouse q r P t are equal to lt and li , respectively, where lt i i
i40

a Rnd(XY) denotes the number which is randomly drawn between X and Y.

Table 2 An example of the optimal IDP for a one-warehouse/two-retailer supply chaina Period 1 2 3 4 5 6 7

Acquisition plan at the warehouse 63 0 0

42

Transportation plan from the warehouse to retailer i (lead time 1) i 0 to i 1 0 36 0 0 24 0 0 i 0 to i 2 0 27 0 0 18 0 0 Inventory level at the warehouse 0 0 0 Inventory level at the retailer i i1 12 0 24 i2 9 0 18 Demand at the retailer i i1 12 12 i2 9 9 12 9 0 12 9 12 9 0 0 0 12 9 0 12 9 12 9 0 0 0 12 9

denotes mean of demand at retailer i in period t. The initial inventory at the warehouse is set to ki0 st i0 and the initial inventory at retailer i is set to fLi0 Li lt ki st g. i i The full factorial experiments are performed in which the following parameters are varied: the number of retailer in the supply chain (two retailers or six retailers), the demand pattern (stationary or non-stationary demand), and xed ordering cost Ai (high or low level). Two supply chain sizes are considered in order to represent small and large supply chains. Fig. 2 shows two types of demand patterns. Pattern I is a stationary demand pattern where the demand has a constant mean. Pattern II is a non-stationary demand pattern. The demand Pattern II involves a situation in which the mean immediately changes from a low level to a high level for a certain interval and immediately returns to the low level again. This demand behavior is commonly found in practice, for example, some businesses may have relatively high demands at the beginning periods of each month and relatively low demands at the remaining periods. Some businesses may have high demands on every Friday and Saturday, but low demands on other days. In this case, there are high and low levels of mean demand. This change can occur several times during the year. For each case of the two-level factorial experiment, the mean of demand in stationary mode is randomly drawn from the interval 515. In the nonstationary mode, mean of demand at low/high level is randomly drawn from the interval 515/2575.

a The parameters of this example are set as follows. ki 0 for all i, IEt0 ki0 st for i 0, IEt0 fL0 Li lt ki st g for i i i i i0 all i40, and other parameters are set according to Table 1.

Fig. 2. Two interesting demand patterns.

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The high level occurs at the 16th period until the 25th period. Note that after randomization, all random values of means are used for the entire experiment of each case and regenerated when the case has been changed. The variation of the xed ordering cost Ai is considered in order to represent the lost-sizing policy. The high level of the xed ordering cost Ai representing big lot size (approximately covering three or four periods of demand) is set as shown in Table 1. The low level representing small lot size (approximately covering one or two periods of demand) is set at 50% of the high level. 7. Results and discussions This section contains results of the simulation experiments. 7.1. Results of the study on the effects of the safety stock factors The mean values of total costs and ll rates are recorded for all eight cases of the two-level factorial experiment of three parameters: number of retailer, demand pattern, and ordering cost. An example of the simulation results for the one-warehouse/tworetailer supply chain operating under high rate of ordering cost and stationary demand is shown in Fig. 3. It shows effects of the safety stock factors on the mean values of total costs and ll rates.

Based on the results, some interesting points are observed. The safety stock factors at the retailers (K2) affect the system ll rate. Fig. 3b shows that the system ll rate is signicantly increased when the safety stock parameter at retailers (K2) is increased. This indicates that safety stocks carried at the retailers always contribute to customer service levels. In contrast, Fig. 3b also shows that the safety stock parameter at the warehouse (K1) insignicantly affects the system ll rate, but it signicantly affects the total cost (see Fig. 3a). The increase of K1 increases the total costs without improving the system ll rates. It is also observed that there are many safety stock policies [K1,K2] that give the same system ll rate, for example, the policies [0,3], [1,3], [2,3], and [3,3] can give the same system ll rate of approximately 99% (see Fig. 3b). However, the best safety stock policy which can give the system ll rate of 99% is [0,3] because it provides the lowest total cost (see Fig. 3a). Note that the results for other seven cases (not shown here) are similar to the one in Fig. 3, all cases lead to a conclusion that the safety stock parameter at the warehouse (K1) should be zero (assuming that negative safety stock which leads to negative ending inventory is not allowed) and that at the retailers (K2) affect both system ll rates and total costs. This conclusion is also conrmed by the one-way ANOVA test. This remark coincides with plenty of existing literature in the eld, for example, the paper

Fig. 3. Effects of safety stock factors on the average total costs and ll rates.

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of De Kok and Fransoo (2003), Whybark and Yang (1996), Schwarz et al. (1985), and Badinelli and Schwarz (1988). 7.2. Comparison results between the IDP and R,s,S control systems The average total costs of both control systems are plotted against the average ll rates in Fig. 4. Note that the results in tabular form with appropriate control parameters are provided in Appendix B. For each case in Fig. 4, there are ve points of ll rate in which the average total cost of the IDP control system is compared to that of the echelonstock R,s,S control system. Note that the ve points of the IDP control system are obtained by using the safety stock policies [0,0], [0,0.7], [0,1.4], [0,2.1], and [0,2.8], respectively. The safety stock parameters at the warehouse are zero since they result in low total costs. The bold numbers on each chart are p-value (observed signicance level) obtained from the paired t-test between average total costs of the IDP control system and the echelon-stock R,s,S control system. Based on the results, there are a number of observations as follows. 1. For each case shown in Fig. 4, the minimum total costs for both control systems are obtained at the ll rate approximately between 97% and 99%. When the ll rates are higher or lower than this, the total costs are also higher. However, the ll rate that gives the lowest total costs may change according to the supply chain cost structure (see also Section 7.3). 2. From Fig. 4, it is clear that the IDP control system provides better results for non-stationary demand. The average total costs of the IDP control system are always lower than those of the echelon-stock R,s,S control system for all values of ll rate (see cases 2, 4, 6, and 8). The pvalue of zero also reveals that the difference is statistically signicant. Nevertheless, in case of stationary demand, the difference between both systems is not signicant at the signicant level of 0.05 (see cases 1, 3, 5, and 7). 3. The ordering cost is varied to evaluate the effect of lot sizes on the performance of both systems. Based on the experimental results in Fig. 4, the IDP control system signicantly outperforms the echelon-stock R,s,S control system when demand is non-stationary for both

levels of ordering costs (both small and large lots). 4. The one-warehouse/two-retailer supply chain represents a small supply chain while the onewarehouse/six-retailer supply chain represents a large supply chain. It can be seen from Fig. 4 that the IDP control system still signicantly outperforms the echelon-stock R,s,S control system when demand is non-stationary for both supply chain sizes. 5. Based on the experiments, the IDP control system always provides at least 90% of ll rate (see Fig. 4), even though the safety stock policy [K1,K2] is set to the worst case [0,0]. For the echelon-stock R,s,S control system, the system ll rate can be lower than 90%, if the control parameters are set improperly (not shown here). Thus, the user must carefully set the control parameters of the echelon-stock R,s,S control system, otherwise the system performance may be unacceptable. It is noted that the IDP control system always outperforms the echelon-stock R,s,S control system when demand is non-stationary. Nevertheless, one might argue that a method in which the echelonstock R,s,S control system uses to deal with the nonstationary demand situation (see Appendix A) might not be optimal. Unfortunately, to the best of our knowledge, the optimal method is not available in the existing literature. Thus, the method to deal with non-stationary demand in this paper follows a logical sensecompensate the control parameters (s,S) by the associated lead time (see Appendix A for details). Thus, the dominance of the IDP control system toward the echelon-stock R,s,S control system is proved under this experimental setting. We reserve the determination of the optimal method of the echelon-stock R,s,S control system to deal with non-stationary demand as future research. Interestingly, in contrast to the above result, De Kok and Fransoo (2003) also compared the performance of a backlogging LP-based system with a stochastic inventory model under the SBS policy. The SBS operates under the concept of the base stock policy in which the inventory position will be brought up to desired target level in every inventory review. De Kok and Fransoo (2003) concluded that the SBS outperforms the LP-based system considerably because it uses a sophisticated ordering method. The SBS allows the target level S to be changed in every review according to the

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Demand Pattern Stationary Demand One Warehouse and Two Retailers Low rate of ordering cost High rate of ordering cost CASE 1 2,200 Total Cost (TC) 2,100 2,000 1,900 1,800 91 % 92 % 93 % 94 % 95 96 % % Fill-rate CASE 3 2,200 Total Cost (TC) Total Cost (TC) 2,100 2,000 1,900 1,800 1,700 88% IDP R,s,S 90% 92% 0.31 0.26 0.57 0.16 94% 96% Fill-rate CASE 5 5,600 One Warehouse and six Retailers Low rate of ordering cost High rate of ordering cost 5,200 4,800 4,400 4,000 92% 0.28 IDP R,s,S 94% 96% Fill-rate CASE 7 5,600 0.12 Total Cost (TC) Total Cost (TC) 5,200 4,800 4,400 4,000 90% 11,200 10,200 9,200 8,200 92% 0.00 98% 0.31 11,400 10,600 0.00 9,800 IDP R,s,S 9,000 92% 94% 96% Fill-rate CASE 8 98% 100% 0.06 4,700 4,300 3,900 IDP R,s,S 3,500 92% 94% 96% Fill-rate CASE 6 0.00 98% 0.00 0.00 0.00 0.00 100% 97 % 98 % 99 100 % % IDP R,s,S Total Cost (TC) 0.71 0.26 0.07 0.11 5,400 4,900 0.00 4,400 3,900 3,400 94% IDP R,s,S 95% 96% 97% Fill-rate CASE 4 98% 99% 100% 0.00 0.00 0.00 0.00 Non-stationary Demand CASE 2

0.12

Total Cost (TC)

0.71 0.18 0.44

Total Cost (TC)

0.00 0.00 0.00 0.00

100%

98%

100%

0.24 0.19 IDP R,s,S 92% 94% 96% Fill-rate 0.47 0.25 98% 100%

0.00 0.00 IDP R,s,S 94% 96% Fill-rate 98% 0.00

0.00

100%

Fig. 4. Total costs and ll rates obtained from the experiments.

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inventory status in the entire system such that the inventory is pushed towards the locations where customer demand must be met. In addition, the SBS uses a linear rationing rule which can ensure that shortages are shared among destinations while the LP-based model concerned in their paper uses a greedy rationing approach. However, De Kok and Fransoo (2003) have been concerned with particular situations, excluding the lot-sizing situation, the lost-sale model, and the non-stationary demand case, and then kept these situations for the future investigation. In this paper, we explore these gaps and give managerial insights. For the non-stationary demand, the IDP outperforms the echelon-stock R,s,S control system under this experiment setting. For the stationary demand case, both systems are indifferent. The echelon-stock R,s,S control system cannot dominate the IDP because its control parameters are xed throughout the experiment, unlike the parameter S of the SBS concept. 7.3. Results of the study on effects of cost structures When the cost structure of the supply chain is changed by increasing the unit lost-sale cost by 20%

until 100% and repeat all experiments, the comparison of results on performances of both control systems are still unchanged. The graphs showing total costs and ll rates of both control systems for only cases 1 and 2 when the unit lost-sale cost is increased by 20% are presented as an example in Fig. 5. It can be seen that the increase of unit lostsale cost only affects the minimum point. The minimum point is shifted to the right (higher ll rate) because the system needs more inventories to protect against the higher unit lost-sale cost. Therefore, the IDP control system outperforms the echelon-stock R,s,S control system for non-stationary demand at various cost structures. 8. Conclusions This paper proposes a new control system called IDP control system for a one-warehouse/multiretailer supply chain. The IDP model, which is a MILP model, is developed to determine optimal inventory and distribution plan that minimizes total related costs including ordering, holding, holding in transit, transportation, and lost-sale costs. The IDP is updated every period following one-period rolling

2,200 Total Cost (TC) 2,100 2,000 1,900 1,800 0.71

CASE 1

2400

CASE 1 - 20% increase of unit lost-sale cost 0.71 0.28 IDP R,s,S 95% 96% 97% Fill-rate CASE 2 - 20% increase of unit lost-sale cost 98% Lowest Point 0.11 0.11 99% 0.14

Total Cost (TC)

Lowest Point 0.12 0.11 0.26 0.07 97 % 98 % 99 % 100 %

2200 2000 1800 94%

91 %

92 %

93 %

94 %

95 96 % % Fill-rate CASE 2

100%

5,400 Total Cost (TC) 4,900 4,400 3,900 3,400 94% 0.00

5800 Lowest Point

Total Cost (TC)

5300 4800 4300 3800 94%

0.00 0.00 0.00

0.00

0.00 0.00

Lowest Point 0.00 0.00 0.00

IDP R,s,S 95% 96% 97% Fill-rate 98% 99% 100%

95%

96%

97% 98% Fill-rate

99%

100%

Fig. 5. Effect of unit lost-sale cost on the lowest point of total cost.

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horizon planning concept. Note that the IDP control system can be easily extended to plan and control the supply chain with multiple warehouses and retailers by modifying the MILP model presented in Section 3. The IDP control system is evaluated against the echelon-stock R,s,S control system. Based on the experimental results, the IDP control system has signicantly lower total costs than the echelon-stock R,s,S control system for any range of ll rates for non-stationary demand situation. Moreover, the IDP control system signicantly outperforms the echelon-stock R,s,S control system for different sizes and inventory cost structures of the supply chain. However, both systems are indifferent in case of the stationary demand situation. It can be concluded that the IDP control system is effective for both demand patterns. The IDP control system is effective since the decision for basic actions (i.e. ordering time and amount) is more sophisticated than that of the echelon-stock R,s,S control system. Replenishment orders are placed according to the optimal plan. In fact, the inventory and transportation quantities of the IDP control system are dynamic. They are obtained by solving a MILP model which considers the most up-to-date information of the entire system. The echelon-stock R,s,S control system also provides good results when the demand is stationary. Implementing an IDP control system needs some coordination among supply chain members. Each member should transfer some information, at least its on-hand inventory to the planner to generate a new optimal plan. This is quite a difcult task if each member belongs to different owners. Therefore, future research should study a coordination scheme or a reward system (e.g. incentive mechanisms) to fairly allocate the benets obtained from an IDP control system between the warehouse and retailers to encourage such coordination. In addition, the case of non-identical retailers should also be investigated in the future by allowing the safety stock factors to be varied among the retailers.

under the Royal Golden Jubilee Ph.D. Program, Contract no. PHD/0056/2545. Appendix A. Method to determine the control parameters of the echelon-stock R,s,S control system under the non-stationary demand pattern The demand pattern II involves a situation in which the mean immediately changes from a low level to a high level for a certain interval and immediately returns to the low level again. A method to determine the control parameters of the echelon-stock R,s,S control system under the demand pattern II is based on the change of reorder point s and order-up-to level S from a low level to a high level according to the change of mean demand. This change must be done at an appropriate time so that the right amount of product is shipped to the demand points at the right time. The appropriate time to change the reorder point s and order-up-to level S from the low level to the high level is easily determined by lead-time offsetting as shown in Fig. 6. For the low-level demand periods, the control parameters of the echelon-stock R,s,S control system are determined and used during the lowlevel demand interval, denoted by IV[t1,t2-L] where t1 and t2 represent the time at which the low-level demand starts and ends, respectively. For

Acknowledgement The researchers would like to give a special thanks to Thailand Research Fund for the supports. This research is an extension of the research work

Fig. 6. R,s,S policies under demand pattern II, non-stationary demand.

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the high-level demand periods, the control parameters are re-determined and used during the interval IV[t2L,t3L], where t3 represents the time at which the high-level demand ends. Note that L represents the related lead time (L equals Li for determining the parameters for the retailers but equals Li 0+Li for determining the parameters for the warehouse).

Appendix B. Results of the experiments in tabular form including control parameters of the echelonstock R,s,S and IDP control systems Appendix B contains Tables 3 and 4 which present the results of the experiments including control parameters of the echelon-stock R,s,S and IDP control systems.

Table 3 Total costs and ll rates of the one-warehouse/two-retailer supply chain operating under the IDP control system and the echelon-stock R,s,S system System p-value Fill rate (%) Total cost Warehouse Retailer 1 Retailer 2

Case 1: Two retailers, stationary demand, and high rate of xed ordering cost IDP[0|0.0] 0.71 91.46 2130 Reorder point R,s,S 91.50 2146 Order-up-to S IDP[0|1.0] 0.26 94.74 1923 Reorder point R,s,S 94.33 1946 Order-up-to S IDP[0|2.0] 0.07 97.22 1894 Reorder point R,s,S 97.37 1930 Order-up-to S IDP[0|3.0] 0.11 98.90 1945 Reorder point R,s,S 98.90 1974 Order-up-to S IDP[0|4.0] 0.12 99.95 2008 Reorder point R,s,S 99.92 2036 Order-up-to S

s s s s s

100 190 100 235 120 170 120 240 125 250 100 225 100 235 110 220 120 170 125 250 87 158 95 165 110 140 115 145 125 165 87 148 92 160 95 208 110 140 (334) (334) (353) (353) (365) (365) (376) (376) (368)a (558)a (376) (568) (382) (574) (390) (582) (395) (600)

16 74 21 80 23 83 26 85 28 89 20 79 23 80 24 85 25 87 28 89 14 50 18 59 22 59 24 68 27 75 18 68 21 71 23 74 24 75 (117) (117) (120) (120) (126) (126) (129) (129) (94) (195) (98) (205) (102) (205) (108) (208) (112) (216)

16 74 21 80 23 83 26 85 28 89 20 79 23 80 24 85 25 87 28 89 14 50 18 59 22 59 24 68 27 75 18 68 21 71 23 74 24 75 (117) (117) (120) (120) (126) (126) (129) (129) (94) (195) (98) (205) (102) (205) (108) (208) (112) (216)

Case 2: Two retailers, non-stationary demand, and high rate of xed ordering cost IDP[0|0.0] 0.00 94.91 4310 Reorder point s R,s,S 94.86 4954 Order-up-to S IDP[0|1.0] 0.00 97.24 4033 Reorder point s R,s,S 97.27 4711 Order-up-to S IDP[0|2.0] 0.00 98.48 3891 Reorder point s R,s,S 98.44 4615 Order-up-to S IDP[0|3.0] 0.00 99.19 3922 Reorder point s R,s,S 99.21 4611 Order-up-to S IDP[0|4.0] 0.00 99.95 3950 Reorder point s R,s,S 99.92 4684 Order-up-to S Case 3: Two retailers, stationary demand, and low rate of xed ordering cost IDP[0|0.0] 0.06 90.28 2050 Reorder point R,s,S 90.28 2186 Order-up-to S IDP[0|1.0] 0.31 95.73 1812 Reorder point R,s,S 95.74 1893 Order-up-to S IDP[0|2.0] 0.16 98.25 1728 Reorder point R,s,S 98.26 1790 Order-up-to S IDP[0|3.0] 0.26 99.17 1755 Reorder point R,s,S 99.17 1778 Order-up-to S IDP[0|4.0] 0.57 99.96 1795 Reorder point R,s,S 99.92 1799 Order-up-to S s s s s s

Case 4: Two retailers, non-stationary demand, and low rate of xed ordering cost IDP[0|0.0] 0.00 93.22 4163 Reorder point s R,s,S 93.26 4471 Order-up-to S IDP[0|1.0] 0.00 96.38 3788 Reorder point s R,s,S 96.39 4091 Order-up-to S IDP[0|2.0] 0.00 97.48 3676 Reorder point s R,s,S 97.48 3927 Order-up-to S IDP[0|3.0] 0.00 98.72 3561 Reorder point s R,s,S 98.72 3747 Order-up-to S

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a

C. Monthatipkul, P. Yenradee / Int. J. Production Economics 114 (2008) 119133

p-value 0.00

Fill rate (%) 99.89 99.91

Total cost 3661 3827 Reorder point s Order-up-to S

Warehouse 120 (394) 160 (394)

Retailer 1 27 (134) 92 (134)

Retailer 2 27 (134) 92 (134)

The numbers inside and outside parentheses are control parameters at the high and low levels of non-stationary demand, respectively.

Table 4 Total costs and ll rates of the one-warehouse/six-retailer supply chain operating under the IDP control system and the echelon-stock R,s,S system System p-value Fill rate (%) Total cost W R1 R2 R3 R4 R5 R6

Case 5: Six retailers, IDP[0|0] 0.71 R,s,S IDP[0|1] 0.18 R,s,S IDP[0|2] 0.28 R,s,S IDP[0|3] 0.31 R,s,S IDP[0|4] 0.44 R,s,S Case 6: Six retailers, IDP[0|0] 0.00 R,s,S IDP[0|1] 0.00 R,s,S IDP[0|2] 0.00 R,s,S IDP[0|3] 0.00 R,s,S IDP[0|4] 0.00 R,s,S Case 7: Six retailers, IDP[0|0] 0.12 R,s,S IDP[0|1] 0.24 R,s,S IDP[0|2] 0.19 R,s,S IDP[0|3] 0.25 R,s,S IDP[0|4] 0.47 R,s,S Case 8: Six retailers, IDP[0|0] 0.00 R,s,S IDP[0|1] 0.00 R,s,S IDP[0|2] 0.00 R,s,S IDP[0|3] 0.00 R,s,S IDP[0|4] 0.00 R,s,S

stationary demand, and high rate of xed ordering cost 92.28 5289 s 250 16 92.38 5357 S 410 78 96.60 4715 s 280 18 96.64 4841 S 420 83 98.92 4523 s 300 24 98.97 4629 S 420 85 99.71 4502 s 330 26 99.51 4577 S 400 86 99.99 4592 s 345 28 99.99 4691 S 430 95 non-stationary demand, and high rate of xed ordering cost 94.16 10,406 s 275 (547) 17 (60) 94.12 11,770 S 432 (742) 80 (322) 96.64 9611 s 280 (620) 19 (70) 96.65 10,578 S 420 (900) 80 (294) 98.25 9100 s 300 (750) 21 (94) 98.26 10,072 S 400 (750) 85 (249) s 305 (600) 23 (97) 98.52 9220 98.60 10,137 S 420 (960) 86 (332) 99.99 9440 s 345 (800) 25 (98) 99.91 10,516 S 430 (800) 90 (312) stationary demand, and low rate of 90.62 5209 s 90.59 5302 S 94.74 4400 s 94.69 4553 S 97.50 4081 s 97.49 4277 S 98.18 4044 s 98.17 4146 S 99.99 4132 s 99.99 4242 S xed ordering cost 245 15 335 65 260 18 345 64 310 20 345 68 300 23 366 65 345 26 345 72 xed ordering cost (750) 15 (74) (750) 57 (74) (820) 19 (97) (820) 66 (97) (990) 20 (100) (990) 67 (100) (1100) 22 (123) (1100) 65 (123) (1200) 27 (136) (1200) 75 (136)

16 78 18 83 24 85 26 86 28 95 17 80 19 80 21 85 23 86 25 90 15 65 18 64 20 68 23 65 26 72 15 57 19 66 20 67 22 65 27 75 (74) (74) (97) (97) (100) (100) (123) (123) (136) (136) (60) (322) (70) (294) (94) (249) (97) (332) (98) (312)

16 78 18 83 24 85 26 86 28 95 17 80 19 80 21 85 23 86 25 90 15 65 18 64 20 68 23 65 26 72 15 57 19 66 20 67 22 65 27 75 (74) (74) (97) (97) (100) (100) (123) (123) (136) (136) (60) (322) (70) (294) (94) (249) (97) (332) (98) (312)

16 78 18 83 24 85 26 86 28 95 17 80 19 80 21 85 23 86 25 90 15 65 18 64 20 68 23 65 26 72 15 57 19 66 20 67 22 65 27 75 (74) (74) (97) (97) (100) (100) (123) (123) (136) (136) (60) (322) (70) (294) (94) (249) (97) (332) (98) (312)

16 78 18 83 24 85 26 86 28 95 17 80 19 80 21 85 23 86 25 90 15 65 18 64 20 68 23 65 26 72 15 57 19 66 20 67 22 65 27 75 (74) (74) (97) (97) (100) (100) (123) (123) (136) (136) (60) (322) (70) (294) (94) (249) (97) (332) (98) (312)

16 78 18 83 24 85 26 86 28 95 17 80 19 80 21 85 23 86 25 90 15 65 18 64 20 68 23 65 26 72 15 57 19 66 20 67 22 65 27 75 (74) (74) (97) (97) (100) (100) (123) (123) (136) (136) (60) (322) (70) (294) (94) (249) (97) (332) (98) (312)

non-stationary demand, and low rate of 92.67 10,171 s 265 92.64 11,803 S 325 95.81 9041 s 290 95.80 10367 S 340 97.13 8725 s 280 97.14 9795 S 340 97.86 8574 s 320 97.92 9797 S 370 99.75 8796 s 345 99.85 10,062 S 345

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