A Power-of-two Ordering Policy for One Warehouse, Multi-Retailer Systems with Stochastic Demand

We study a two-echelon supply chain with one warehouse and N retailers facing stochastic demand. An easy-to-implement inventory policy, the so-called power-of-two policy, is proposed to manage inventory for the system. To maintain a certain service level, safety stocks are kept at the warehouse and each retailer outlet to buffer random demand. We develop a polynomial algorithm to find a power-of-two ordering policy for arbitrary target service level, whose cost is guaranteed to be no more than 1.26 times the optimal cost. Such a policy can be computed in time O(N³).