An easily implementable hierarchical heuristic for a two-echelon spare parts distribution system

This paper addresses a two-echelon spare parts stocking and distribution system consisting of a central Distribution Center (DC) and regional facilities. Because the primary purpose for holding inventory is to provide timely repairs of customerʹs equipment, we set as our objective to minimize total inventory investment subject to constraints on the delay due to parts outages. We decompose the resulting problem by level and by facility. By simplifying the expressions for the delay constraints and applying previously developed heuristics for the single-level problem [1], we are able to derive closed-form expressions for the inventory control parameters. We then develop a search algorithm (on DC fill rate) to approximate the parameters (Lagrange multipliers) in the closed-form expressions. Numerical comparisons against an analytic lower bound and, for small problems, exact solutions show the approximation to be quite accurate. We also found that it outperforms methods currently in use by the firm that motivated this work. Finally, because it yields closed-form expressions for inventory control parameters and the parameters are only updated periodically, the policy is "easily implementable" once suitable Lagrange multipliers have been computed.