Optimization of (R;Q) policies for two-level distribution inventory systems with operating flexibility

Guaranteed-Service Approach (GSA) was used to set safety stocks for multi-echelon inventory systems. This approach assumes that each stock can use operating flexibility measures such as expediting and overtime to fulfill excessive customer demand superior to a bound as a supplement to its safety stock. In this paper, we consider a two-level distribution inventory system with Poisson final demand and fixed costs at each stock controlled by a (R, Q) policy. We use the GSA to optimize the policy with the consideration of operating flexibility costs and fixed order costs. A deterministic mathematical programming model is established for the problem. This model is solved by a line search for finding the optimal target cycle service level to customer and an iterative procedure for solving the model. Numerical experiments on randomly generated instances demonstrate the efficiency of the procedure.