The (s, t) Policy for a Two-echelon Inventory System with Returns

A model of two-echelon inventory system consisting of a warehouse and a distributor with periodic-review and with stochastic demand as well as stochastic return is considered, where the distributor must order either none or at least as much as a minimum order quantity in each time period. First, a simple heuristic policy (S, t) is studied and it is specified by only two parameters S and t, which determine different ordering quantities in each period. Second, the (S, Q) policy that is often utilized in the real world is compared with it. Finally, the conclusion is obtained through a numerical study. We demonstrate that the best (S, t) policy outperforms the best (s, Q) policy in most instances, the optimal t changes very sharply when the minimum order quantity increases, what's more, we develop insights into the impacts of ration of return to demand, mean demand and standard deviation of demand on the error between (s, t) policy and (S, Q) policy.