Base-Stock Distributed Inventory Management in

Continuous-Review Logistic Systems Control

System Perspective
Przemysaw Ignaciuk, Member, IEEE
Institute of Information Technology
Lodz University of Technology
215 Wlczaska St., 90-924 d, Poland
e-mail: przemyslaw.ignaciuk@p.lodz.pl

AbstractIn the paper, the dynamics of goods distribution formally shown to always establish a feasible, i.e., nonnegative
systems managed according to the continuous-review base-stock and bounded, replenishment signal. The stock level at the
inventory policy are investigated. As opposed to the previous nodes is demonstrated nonnegative as well, with precisely
studies, which limit the scope to the fundamental serial and tree- determined upper bound. The choice of the reference stock
like settings, a multi-echelon mesh topology of interconnected level is discussed through a steady-state analysis for piece-wise
actors (suppliers, distribution center, retailers) is considered. The constant demands.
exogenous, uncertain demand may be imposed on any node in the
controlled system, not just conveniently selected end points. The
stock replenishment orders are realized with nonnegligible delay. II. SYSTEM MODEL
A state-space model to study the properties of base-stock policy is
proposed. The choice of control system parameters for obtaining A. Fundamental system actors and their interaction
a high service level with reduced holding costs is discussed. The The systems analyzed in the paper comprise a set of
analytical findings are supported by numerical tests. interacting components suppliers, distribution center, retailers
involved in satisfying an externally imposed demand. An
KeywordsInventory control; multi-echelon systems; time- example configuration of three controlled nodes (a distribution
delay systems; dead-time compensation.
center and two retailers) and two external suppliers with
demand placed at each controlled node is presented in Fig. 1.
I. INTRODUCTION Neither the exact pattern, nor statistics of future demand are
The complications arising from introducing mesh known beforehand. From the logistic system perspective, the
connectivity, although clearly visible in modern production and demand is a driving factor for the system operation, whereas in
goods distribution systems, so far have constrained the the control-system framework it constitutes an uncertain input
analytical and numerical studies mainly to the fundamental treated as a disturbance.
architectures: single-echelon [1][3], serial [4], or arborescent
ones [5][7]. However, the practical importance of multi-
echelon constructs can no longer be overlooked [8][10]. This
paper aims to establish a formal framework to study the
dynamics of continuous-review networked logistic systems
subject to base-stock inventory control and delayed goods
transshipments.
Multi-echelon systems with arbitrary connection topology
are considered. The uncertain, time-varying demand can be
placed at any node in the system. No explicit assumption is
taken regarding the stochastic process behind the demand
evolution, safe it is bounded. Its influence is examined through
the application of robust inventory control framework [11].
The stock replenishment process is governed by the Fig. 1. Example goods distribution network, used in the numerical study.
continuous-review base-stock inventory policy, deployed in a
distributed way at the network nodes (each node takes In contrast to the majority of earlier studies, an arbitrary
independent ordering decisions). The ordered quantity is topology (satisfying basic assumptions of a unidirectional path
acquired with non-zero lead-time delay from neighboring connecting each element of the controlled system to at least
nodes and external sources. A state-space model to study the one supplier) is considered. The controlled elements in the
system dynamics, covering the nonlinear phenomena related to analyzed network structure distribution centers, retailers
the goods shortage and lost sales, is proposed. The policy is will be termed nodes. The network encompasses n nodes with

978-1-5386-2402-9/17/$31.00 2017 IEEE 1027

the indices belonging to the set n = {1, 2,, n}. The stock
within the controlled network, depleted according to the
demand, is replenished from m external sources the suppliers.
The set of indices, including those of the controlled nodes and
the suppliers, will be denoted by = {1, 2,, m + n}.
The evolution of time will be marked by the continuous
variable t. Let si(t) represent the stock level of goods gathered
at controlled node i, i n, and di(t) be the intensity of external
demand imposed on that node at time t. The sequence of
actions taken at node i is as follows:
1. Obtain the record of stock level si(t), received
shipments, and demand di(t).
2. Try to fulfill the external demand from the
accumulated resources (from the stock and received
shipments). In the case of deficit, the surplus demand is
lost, i.e., the customers realize the excess purchase
outside the network if their request cannot be answered
immediately by node i and leave the system.
3. Gather the requests for goods that originate from the
neighbors in the controlled network.
4. Try to respond to the internal requests using the
resources left over after serving the external demand. If
it is not possible, the requested quantity is decreased in
proportion to the ordered one, e.g., if the shortage at
time t equals sg(t) then the orders placed at the node
experiencing the shortage, say q1 and q2, shrink to
q1(t)[1 sg(t)/(q1(t) + q2(t))] and q2(t)[1 sg(t)/(q1(t) +
q2(t))], respectively.
5. Send the goods to the neighbor nodes inside the
controlled network in the quantity updated as stated in
p. 4.
The stock of goods accumulated at a node is used to serve
the demand originating from the market and internal requests
imposed on that node. The market demand may be placed at
any point (node) in the network, which is a factor seriously
complicating policy design and tuning [8], yet it allows one to
more closely model the phenomena occurring in the actual
logistic systems. According to the rules 15 stated above,
responding to the external demand takes priority over the
internal requests.
In the proposed model, the external demand is represented
by an uncertain, time-varying function of time
0 di(t) dimax
where d 0 denotes the upper estimate of di(t). No further
i
max
assumption is taken regarding the demand evolution, i.e., it can
be any deterministic or stochastic function of time, treated here
as a bounded perturbation.
Let qiR (t ) denote the goods quantity received by node i and
qiS (t ) the shipments sent by this node towards the neighbors
inside the controlled network at time t. Since the network under
consideration operates in the lost-sales mode (the excess
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demand is realized outside the system), for the dynamics
description it is convenient to introduce another function pi(t)
representing the actually realized purchases at node i,
pi (t ) min{si (t ) qiR (t ), di (t )}.
With this notation, the stock balance equation at node i may be
written as
si (t ) qiR (t ) pi (t ) qiS (t ).
The order quantity requested by node i at time t from all its
suppliers (external sources or other nodes inside the network)
will be denoted by qi(t), i n. With the lot part to be acquired
from supplier j, j , specified by the partitioning coefficient
ji(t) [0, 1], the goods quantity sent by node i to its neighbors
inside the controlled network
qiS (t ) (t )q (t ).
j n
ij j
The inventory management system attempts to allocate the
entire order, partitioned according to the nominal coefficients
ij, to nodes i suppliers. If the nominal partitioning is not
possible due to goods shortage the coefficients are
appropriately decreased (rule 4) and
0
i j
ji (t ) 1.
When supplier j has accumulated enough goods to immediately
respond to the order originating from node i, then ij(t) = ij,
whereas in the case of resource shortage ij(t) < ij. The external
sources are not subject to capacity limitation they never
experience shortage. Without loss of generality the network is
assumed connected, i.e., no node works in isolation and there
exists a path from at least one external source to each node. It
is also directed, i.e., whenever ji(t) 0, then ij(t) = 0, and for
any i n, ii(t) = 0 so that no node is its own supplier.
The order realization takes time. It is quantified in the
model through lead-time delay covering all the activities
related to document processing, shipment preparation, and
goods displacement. Denoting the delay in order realization
between node i and its supplier j by ji, ji , the goods
quantity received by node i at time t,
qiR (t )
j
ji (t ji )qi (t ji ).
The finite set comprises all the delays characterizing
internal interconnections and links to the external sources.
There are no open orders, nor shipments in transit, before the
control process commences at t = 0, i.e., qi(t) 0 and ji(t) 0
for t < 0.
B. State-space description
s(t )
For the sake of conducting a formal analysis, the system t t t
dynamics will be described in a state space. The following
state-space model is proposed:
s(0) 0 ( )q( )d

( )q( )d p( )d
0
0 0
t t t
s (t ) 0 (t )q(t ) (t )q(t ) p(t ),

s(0) 0 ( )q( )d ( )q( )d p( )d
0 0
t t t
where: s(0) 0 ( )q( )d

( )q( )d p( )d

0 0 0
s(t) = [s1(t) ... sn(t)]T is the state vector the level of t t
stock accumulated at the controlled nodes, s(0) ( )q( )d p( )d.
{0} 0
T
q(t) = [q1(t) ... qn(t)] is the input vector the order 0

quantity requested by the controlled nodes,
For the analysis in a latter part of the paper, it is also
p(t) = [p1(t) ... pn(t)]T is the perturbation vector the
convenient to introduce a constant matrix
realized demands; with dmax = [ d1max ... d nmax ]T, one has
from (1) and (2),
0
0 p(t ) dmax ,

that holds the cumulative information related to network

where denotes point-wise inequality;
topology. The time reference has been omitted in (12) to stress
the hollow matrix the nominal system operating conditions when goods shortage
does not occur.
0 12 (t ) 13 (t ) 1n (t ) Lemma 1: Matrix defined by (12) is nonsingular and its
(t ) 0 23 (t ) 2 n (t )
inverse is a positive matrix.
21
0 (t ) 31 (t ) 32 (t ) 0 Proof: It needs to be shown that all the entries of 1 are
nonnegative. Under the nominal operating conditions, one has
n 1, n (t ) from (5) for each i,
n1 (t ) n 2 (t ) n 3 (t ) 0

describes the network topology its elements reflect

j
ji 1 and
j n
ji 1.

the internal connectivity structure,

the matrices Then, using (9) and (10), the examined matrix

0 I,
i1 (t ) 0 0 0
i: i1
where I is an n n identity matrix. The entries of matrix 0,
0
i: i 2
i 2 (t ) 0 0 ij [1, 0], column-wise sum up at most to 1. Since the

(t ) 0 0 i3 (t ) network is assumed directed (ij 0 ji = 0), the determinant
i: i 3 and all the leading principal minors of equal 1. Therefore,
applying the Sylvesters criterion, it may be concluded that is
0 a positive-definite matrix and thus nonsingular. Moreover,


0 0 0
i: in
in (t )
since ||0|| < 1, with |||| denoting induced norm, the inverse of
can be represented in the form of a series,

provide the information regarding the connection 1 (I ( 0 )) 1 I ( 0 ) ( 0 ) 2

lead-time delays.
Finally, since all the entries of 0 are nonnegative, it
Taking into account the zero initial conditions with respect follows from (15) that matrix 1 is positive.
to the input signal, q(t) 0 for t < 0, and using (7), the stock
level at arbitrary instant t 0 may be calculated as

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 III. BASE-STOCK DISTRIBUTED INVENTORY CONTROL
A. Base-stock inventory policy
The base-stock policy in its fundamental form says to
replenish the stock up to a reference level. Thus, whenever si(t)
drops below the reorder point an order is triggered to refill the
resources having been depleted to answer the market demand.
When the replenishments are realized with positive lead time,
the associated open order quantity needs to be taken into
account in calculating the quantity to be currently acquired. It
is typical to use inventory position (instead of the stock level)
while tracking the amount of resources with respect to the
reference level (see, e.g., [9, ch. 3] for the relevant discussion).
The order quantity (with demand forecast ignored) is
determined as
qi (t ) ri IPi (t ),
where ri is the reference level (the reorder point) and
IPi (t ) si (t ) oi (t )
is the inventory position at node i. The inventory position
incorporates the information about the current stock level si(t)
and stock on order oi(t), i.e., the goods already ordered but not
yet retrieved by node i owing to lead time. The open order
quantity may be obtained as a difference between the received
and requested resources within the control process time span as
t t
oi (t ) ji ( )qi ( )d qiR ( )d
j 0 0 A. Stock replenishment signal
t t
ji ( )qi ( )d ji ( ji )qi ( ji )d ,
j 0 j 0
or, considering the first order placed no sooner than at t = 0, as
t (7), generated according to (21), is nonnegative and bounded.
oi (t ) ji ( )qi ( )d
j 0 j 0
t
j t
ji ( )qi ( )d .
ji
Consequently, the analyzed base-stock policy establishes the
ordering signal at node i according to
qi (t ) ri IPi (t ) ri si (t ) oi (t )
t t
ri si (t )
j t
For notational convenience the summation in (20) is taken over
all j . However, coefficients ji() are non-zero only for the
nodes i suppliers.
From the control system perspective, the way the order
quantity is calculated according to the analyzed policy
indicates the use of a delay compensation mechanism. In fact,
taking into account the integrating process behind the goods
accumulation at the nodes, one may interpret the sum in (20) as
a signal from the Smith predictor [12], appropriately modified
to cover the effects of multiple delay loops and variable
weighting coefficients [6]. The schematic diagram of the
associated control structure implemented at a network node is
depicted in Fig. 2. The value of lot partitioning coefficients
ji(t) is influenced (indirectly) by the state of upstream nodes.
B. Base-stock policy in network context
According to (20), the investigated base-stock policy
generates the stock replenishment signal using the locally
available data only the stock level and order history at node i.
Since information about the entire network topology is not
required, the policy can be deployed in a fully distributed way,
independently at each node. For evaluation of its properties
from the networked system perspective, however, a state-space
representation consistent with (7) will be introduced.
Let r = [r1 ... rn]T be the vector grouping the individual
reference inventory levels. Then, using system description (7)
(10), base-stock policy (20) can be written in vector form as
t
q(t ) r s(t ) ( )q( )d.
t
Expression (21) is introduced to facilitate further analysis.
The distributed nature of its implementation is not affected.
IV. POLICY PROPERTY ANALYSIS
Directly from (21), at the beginning of the control process,
q(0) = r s(0). It means that in order to obtain a feasible
nonnegative and bounded replenishment signal, reference
level r needs to be selected as r s(0). As demonstrated in the
theorem below, for t > 0 function q(t) remains realizable.
Theorem 2: For all time instants t > 0 input q(t) in system
t ji
ji ( )qi ( )d Proof: Substituting (11) into (21), gives
t t
( )q( )d
q(t ) r s(0) 0 ( )q( )d
0 0
t t
p( )d ( )q( )d r s(0)
t
0
t t t
0 ( )q( )d ( )q( )d p( )d
0 0 0
t
ji ( )qi ( )d . r s(0) ( )q( )d p( )d.
{0} 0
0
ji
Consequently, differentiating both sides of (22), one arrives at
q (t )
{0}
(t )q(t ) p(t ).
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 The reference level is set so that s(0) r. Applying (22) to
stock balance equation (7), yields

t
s (t ) (t ) r s (0) ( )q( )d
{0} {0} 0

t

p( )d p(t )
0

t
(t ) s(0) ( )q( )d
{0} {0} 0

t
t

Fig. 2. Base-stock policy with delay compensation mechanism.
p( )d (t ) r p( )d p(t ).
It follows from (5) that the sum of diagonal matrices 0 {0} t
The term in the first square bracket in (27) equals s(t), thus,
(t ) I

and

s (t )
{0}
(t )s(t )

t

(t ) I 0 (t ) . (t ) r p( )d p(t ).
{0} {0} t

At the initial time q(0) = r s(0) 0. Therefore, it comes The largest stock level change may occur under no shortage,
from (23) and (25) that the components of the input vector i.e., when () = . Therefore, investigating s 0 , one
decrease as long as they are bigger than the corresponding obtains
components of (nonnegative) perturbation vector p, yet they
may never fall below zero. On the other hand, for the upper t
bound, one needs to consider the situation when q 0 . In such s(t ) r 1
{0}
p( )d
1
p(t )
a case, once qi() reaches the corresponding level of vector
t

t
1dmax, since pi() dimax (constraint (8)), qi may never grow
beyond that level again, and eventually q(t) 1dmax.
r 1
p( )d

1
p(t ).
t

Theorem 2 demonstrates that the distributed base-stock

policy generates a feasible stock replenishment signal at any
controlled node.
B. Stock limitation
The analysis conducted so far reveals that to ensure a
feasible (nonnegative) replenishment signal the reference stock
level cannot be set below the initial stock. Alternatively, one
may consider only such set of the initial states that satisfy the
inequality s(0) r. The theorem formulated next shows that a
finite stock level is guaranteed throughout the entire control
process for arbitrary, a priori unknown demand pattern.
Theorem 3: If strategy (21) is applied in system (7) to
govern the resource replenishment process, then the stock
accumulated at the nodes is nonnegative and does not exceed
the reference level, i.e.,
0 s(t ) r.
t 0
Proof: Directly from the specification of node behavior
(rules 2 and 4) the stock level at each individual node si(t) 0.
Hence, s(t) 0. It remains to be shown that for any time t 0
the upper bound specified in (26) holds as well.
By definition, 0 and p(t) 0. In turn, it follows from
Lemma 1 that matrix 1 is positive (it contains only
nonnegative entries). Hence, using (29), s(t) r.
C. Reference stock level selection
Theorem 3 shows that if the warehouse capacity is chosen
according to the stock reference level, then all the goods
accumulating at the nodes can be stored locally. The costly
emergency storage space will never be required. In addition to
efficient storage space management, the policy should be tuned
for a high service level (high demand satisfaction). Although
the obtained service level would ultimately depend on the
actual demand pattern in the working system (the exact reorder
point to be selected through numerical optimization), a suitable
choice of r for achieving a 100% service level under the worst-
case conditions can be established through steady-state
analysis.
The steady-state order quantity qss in response to a steady-
state demand dss can be determined by setting q 0 in (23) as
1
qss ss dss ,
{0}

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 Fig. 3. External demand.
ss
where reflects the steady-state matrix (). Then, the
steady-state stock level is obtained from (21) and (30) as
t
sss r qss
q
t
ss
ss d r qss q
1 distributed way, were considered. The policy properties were
r I ss
ss dss .
{0}
For achieving the maximum service level the stock needs to be
kept positive. In the worst case dss = dmax and ss = , yet
adjusting
r I ss 1dmax
allows one to preserve sss > 0.
V. NUMERICAL EXAMPLE
Consider the setting depicted in Fig. 1. Nodes 13 are the
controlled elements subject to the base-stock policy and nodes
4 and 5 constitute the external sources. If not for the vertical
connection between nodes 2 and 3 the setting would be
amenable to the standard analysis methods developed for
separable delivery paths. Another complicating factor is the
demand imposed on all three nodes (d1, d2, and d3), instead of
the typically considered one contact point for the outside
markets. The arrows show the direction of the flow of goods.
As in the mathematical model introduced in Section II, the
interconnections are characterized by the pair: (ij, ij)
(nominal lot partitioning coefficient, lead-time delay). The
demand experiences seasonal variations with abrupt intensity
changes depicted in Fig. 3. Assuming dmax = [35 20 25]T units
the reorder point is selected according to (32) as r = [225 120
140]T units and s(0) = r.
The replenishment pattern generated using (21) is sketched
in Fig. 4 and the resulting stock level in Fig. 5. The established
replenishment signal nonnegative and bounded follows the
seasonal demand trend without oscillations. The stock level
does not exceed the reference (as dictated by Theorem 3) and
stays positive even for the maximum demand imposed
simultaneously at all the nodes. As a consequence, a 100%
service level is obtained.
Fig. 4. Replenishment signal. Fig. 5. Stock level at the nodes.
VI. SUMMARY & CONCLUSIONS
The paper presented a state-space model of entity
interaction in goods distribution systems organized in a
network structure. The continuous-review systems, managed
ss
ss
according to the base-stock inventory policy implemented in a
examined analytically, in particular, it was shown that the stock
does not accumulate beyond the reference level. The reference
level so that full satisfaction of uncertain demand is obtained
was indicated.
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