Title:
Simple Newsvendor Heuristics for Two-Echelon Distribution Networks
Simple Newsvendor Heuristics for Two-Echelon Distribution Networks
Author(s)
Ferguson, Mark E.
Lystad, Erik D.
Lystad, Erik D.
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Abstract
We consider the problem of determining stocking levels in a multi-echelon distribution network
consisting of a warehouse and n non-identical retail locations. Lead-times are deterministic, there are no
fixed ordering costs, and unmet demand is backlogged. Both Clark and Scarf (1960) and Federgruen and
Zipkin (1984b) propose heuristic solutions for such a problem based on a stochastic dynamic
programming formulation. The disadvantage of their formulations lies in the very large state space
needed for its solution. For a serial supply chains, Shang and Song (2003) provide single period
newsvendor problems that bound the optimal stocking levels determined by the Clark and Scarf (1960)
serial supply chain model. Newsvendor bounds have a number of valuable qualities; they are
considerably less computationally intensive, allow for ready parametric analysis, and facilitate the
development of intuition. In this paper, we extend the newsvendor bounds technique to distribution
systems, thus providing a simple and surprisingly accurate heuristic. Through a simulation study, we
show that our heuristic significantly outperforms other common heuristics over a wide range of parameter
values. The closed form solutions provided by the newsvendor bounds also allows us to gain insights
into the system behavior of a distribution network that was not previously possible through alternative
solution techniques.
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Date Issued
2006-03-08
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612113 bytes
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Text
Resource Subtype
Working Paper