Modeling Demand Propagation in Guaranteed Service Models

In this paper, the class of guaranteed service models for multi-echelon inventory management is enhanced with explicit demand propagation. More specifically, the known mixed integer linear programming formulation for the guaranteed service model is refined by new variables and restrictions so that it describes the internal demand propagation exactly for linear demand bound functions. With this feature, aspects like outsourcing as well as decision-dependent stochastic demands at internal stock points can be expressed exactly. The relevance of the new model is shown in an illustrative example, where the new model is able to find a solution with almost 40% lower actual cost compared to the existing approximative model without explicit demand propagation.