Title:
Simple Newsvendor Heuristics for
Multiechelon Distribution Networks
Simple Newsvendor Heuristics for
Multiechelon Distribution Networks
Author(s)
Ferguson, Mark E.
Lystad, Erik D.
Lystad, Erik D.
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Abstract
We consider the problem of determining optimal stocking levels in a multi-echelon distribution
network consisting of m echelons and n non-identical terminal 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 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 allow insights into the system
behavior of a distribution network that was not previously possible through alternative solution
techniques.
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Date Issued
2005-05-05
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438491 bytes
Resource Type
Text
Resource Subtype
Working Paper