Fundamentals of Supply Chain Theory, 2nd Edition

Chapter 6 Multiechelon InventoryModels

6.1 Introduction

In this chapter, we study inventory optimization models for multiechelon (or multistage) systems with shipments made among the stages. There are two common ways to interpret the stages or nodes in a multiechelon system:

1. Stages represent locations in a supply chain network, and links among the stages represent physical shipments of goods. For example, the stages in Figure 6.1(a) may represent the following physical locations: a supplier in China, a factory in California, a warehouse in Chicago, and a retailer in Detroit (respectively).
2. Stages represent processes that the product must undergo during manufacturing, assembly, and/or distribution. Links among the stages represent transitions between steps in the process. For example, the stages in Figure 6.1(a) may represent the following processes: manufacturing, assembly, testing, and packaging. These four functions may take place in four different locations or all within the same building—it is largely irrelevant from the perspective of the model. We sometimes refer to the stages as different “products,” even if they really represent different phases of producing a single product.

Either interpretation is acceptable for the models that we discuss, although some models are more naturally interpreted in one way than the other. In the discussion that follows, we will use terms such as “shipped” or “transferred” under either interpretation to mean “moved from one stage ...