Developing a Model for a Two-Echelon Two-Item Inventory System with Lost Sale and Demand Substitution

Almost all multi-echelon inventory models assume that demands which are not satisfied immediately can be backordered. In some situations, this assumption may not be realistic. For example, we can model stockouts as lost sales when the retailers are in a competitive market and customers can easily turn to another retailer for purchasing goods. So, in this study, assuming lost sales at the retailers, we consider a one-warehouse, several retailers, two-item inventory system where the items can be interchangeably used. Using the well-known METRIC-approximation as a framework, we present a heuristic for finding cost effective base-stock policies. In a numerical study with simulation, we find that the cost of the policies that is gained by the heuristic is on average 12% above the cost of the optimal (S-1,S) policy