The Effect of Initial Inventories in a Two-Echelon System

A model in which jointly optimal stocks of material and finished products are to be chosen is reexamined. While it costs less to hold material, a certain percentage of the random demand not immediately satisfied by previously finished products is lost. We pay particular attention to the dependence of the optimal stocks on the initial ones, which assumes an interesting form. For example, if the stock of finished products is high but the combined stock is low, die quantity of material ordered depends on the stock of finished products.