Heuristic Coordination of Decentralized Inventory Systems Using Induced Backorder Costs

In this paper, we investigate a one‐warehouse multiple‐retailer system, where the inventory control decisions are coordinated using a near optimal induced backorder cost, β*. All installations use continuous review installation‐stock (R, Q) policies. The analysis builds on an approximation model where the stochastic warehouse delays are replaced by their correct averages. The contributions include insights as to how β* is influenced by system parameters, and the determination of simple closed form β* estimates. The latter offering a practical means to achieve coordinated control of large size systems.