Managing the two-echelon distribution systems with dual delivery modes

In this paper, we consider a two-echelon distribution system with dual delivery modes for regional and forward distribution centers (RDC and FDCs). The expedited mode provides a shorter lead time than the regular mode but has a higher unit ordering cost. As the optimal ordering policy for a distribution system with dual delivery modes is unknown, we propose an echelon dual-index policy which is a natural extension of the dual-index policy and echelon base-stock policy that have been proved to be near-optimal/optimal for the single-echelon dual-sourcing system and the multi-echelon serial system, respectively. In addition, we provide different run out rationing policies to guarantee the system’s operation. Based on the system dynamics, we establish the evaluation method for the long-run average total cost, and to accelerate the optimization of the policy parameters, we develop a heuristic algorithm to obtain approximate solutions. Our proposed algorithm is proven efficient in extensive numerical studies compared to the full enumeration. Besides, we also evaluate the performance of different rationing policies and investigate the value of dual delivery modes by comparing four distinct systems. Finally, we numerically explore the impact of the demand distribution (correlation and balance) on the system.