Abstract

We propose an alternative cost accounting function for inventory control
problems on a make to stock setting. Our proposal is based on observing
that the traditional holding and backlog parameters introduce some odd
short term distortions on the inventory state space. Our single stage
cost function accounts for echelon inventories and possesses a pair of
cost parameters for each echelon inventory variable, depending on whether
it is positive or negative.

With the modified cost accounting function we study a two station tandem
system producing a single product and investigate how it compares with
the performance obtained with the usual single stage cost function. The
results available so far show that the optimal policies approach a
multi-echelon base stock structure for each machine. Also, the service
levels achieved are better under the modified function without increasing
the levels of finished goods inventory.

Keywords: Inventory Control, Echelon Inventory, Tandem Machines.