Optimal inventory policy for a Markovian two-echelon system with returns and lateral transshipment

In this paper, we consider a Markovian model for a two-echelon inventory/return system. The system consists of a supply plant with infinite capacity and a central warehouse for inventory and returns. There are also a number of local warehouses which are also capable of re-manufacturing of returns to products. To obtain a high service level of handling inventory and returns, lateral transshipment of demands is allowed among the local warehouses. The objective is to minimize the total expected operating cost by choosing the maximum inventory level at the local warehouses. We present some theoretical results for the proposed model. Numerical examples are also given to demonstrate the performance of the system.