On the First Come-First Served Rule in Multi-Echelon Inventory Control

A two-echelon distribution inventory system with a central warehouse and a number of retailers is considered. The retailers face stochastic demand and replenish from the warehouse, which, in turn, replenishes from an outside supplier. The system is reviewed continuously and demands that cannot be met directly are backordered. Standard holding and backorder costs are considered. In the literature on multi-echelon inventory control it is standard to assume that backorders at the warehouse are served according to a first come-first served policy (FCFS). This allocation rule simplifies the analysis but is normally not optimal. It is shown that the FCFS rule can, in the worst case, lead to an asymptotically unbounded relative cost increase as the number of retailers approaches infinity. We also provide a new heuristic that will always give a reduction of the expected costs. A numerical study indicates that the average cost reduction when using the heuristic is about two percent. The suggested heuristic is also compared with two existing heuristics.