This paper treats a two-echelon inventory system. The higher echelon is a single location reffered to as the depot, which places orders for supply of a single com- modity. The lower echelon consists of several points, called the retailers, which are supplied by shipments from the depot, and at which random demands for the item occur. Stocks are reviewed and decisions are made periodically. Orders and/or shipments may each require a fixed lead time before reaching their respective desti- nations. Section II gives a short literature review of distribution research. Section III introduces the multi-echelon distribution system together with the underlying as- sumptions and gives a description of how this problem can be viewed as a Markovian Decision Process. Section IV discusses the concept of cost modifications in a distribution context. Section V presents the test-examples together with their optimal solutions and also gives the characteristic properties of these optimal solutions. These properties then will be used in section VI to give adapted ver- sions of various heuristics which were used in assembly experiments previously and which will be tested against the test-examples.
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