Abstract
A two-echelon inventory system with one central warehouse and m branch warehouses is considered. The system is replenished once every cycle from an outside supplier, with each cycle then divided into two different phases. In the first phase, the bulk of initial system stock is shipped to the branch warehouses, with some inventory retained at the central warehouse for balancing inventories in branch warehouses in the second phase. In this paper, we propose two methods for determination of the retaining stocks. In the first method, system safety stocks are retained at the central warehouse, and we propose an approximated calculation formula for system safety stock which ensures a predetermined system service level. The other method is to find an optimal retaining stock quantity which minimizes the expected number of system backorders under a given initial system stock, and we identify the relationship between the optimal retaining stock and system conditions.
