Estimating the Impact of Echelon Stock

The goal of this section is to develop intuition regarding the optimal inventory location point in a supply chain. The concepts will be illustrated with a numerical example. 

Consider a supply chain with two spare-parts demand stations that face a daily demand for a part that follows a normal distribution with a mean (fx) of 50 and a standard deviation (cr) of 25. Assume that the parts stations face a replenishment cost (K) of 125, a holding cost (h) of 0.2/day/part, a backorder cost (h) of 5/day/part. Also, suppose each station faces a supply lead time (Z) of 3 days to be replenished by the 

If each parts station were to operate a (Q, r) policy, they would each maintain a reorder level r as follows  

The central warehouse processes orders received from the parts stations. Suppose the costs for the central warehouse are also K = 125, h = 0.2, b = 5, and L = 5. The central warehouse is replenished by vendors and serves as a consolidation point. 

Using an Excel worksheet, simulation of the orders received at the central warehouse generates an average demand across 100 periods oi = 101.07 and the standard deviation, crc = 141.57. With this mean and standard deviation, and using the same formulas as before, the corresponding values of reorder level and order quantity at the central warehouse are as follows  

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