On the Echelon-Order-Up-To policy: A stochastic optimal control approach

Manufacturing and Service Operations Management Conference, June 18th-19th, Beijing, CHINA, 7 pages.

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Abstract

Using stochastic optimal control theory we derive an optimal linear supply chain policy for minimizing a two echelon supply chain’s inventory costs in the face of ARMA(p,q) stochastic demand. We also derive an optimal linear policy that minimizes local inventory costs and compare it to the overall optimal linear policy. This locally optimal linear policy is equivalent to the “Echelon-Order-Up-To” policy. We enumerate the performance of both policies for the more specific case of AR(1) demand. Numerical investigations reveal that the performance enhancement achieved with the overall optimal policy is significant.