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Lesson 4.2 - Multichannel Inventory System
Learning Objectives
After reading this lesson you should be able to:
➢ Understand the tenets of multichannel inventory system
➢ Manage a basic form of multichannel inventory system
➢ Ascertain and assess the determinants of the system
Introduction
In our discussions so far we have considered lot sizing decisions 
to be localized at a single stage of a supply chain. In multi-echelon supply 
chains there are multiple stages, with possibly many players at each stage 
and one stage supplying another. Each participant in a multi-echelon 
system must decide on their lot size. One simple approach is for each 
participant in a multi-echelon system to aggregate its demand and solve 
for the appropriate EOQ to obtain the lot size. 
One problem with this approach is that it may result in 
replenishment orders not being coordinated and the supply chain holding 
more cycle inventory than required. Another problem with this approach 
is that it may lead to an unnecessarily large number of orders, resulting 
in a high order cost in the supply chain. In both cases, the goal is to find 
ordering policies that coordinate orders across the supply chain.
Multichannel Inventory System
First consider a simple multi-echelon system with one manufacturer 
supplying one retailer. Assume that production is instantaneous so the 
manufacturer can produce a lot when needed. If they have the same optimal 
lot size Q but are not synchronized, the manufacturer may produce anew 
lot of size Q right after shipping a lot of size Q to the retailer. Inventory 
at the two stages is as shown in Figure In this case the retailer will carry 

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Notes
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an average inventory of Q/2 and the manufacturer will carry an aver ager 
inventory of about Q.
In contrast, if the manufacturer synchronizes his production to 
match shipment to the retailer, he can arrange for his lot to be produced 
just when the retailer order is to be shipped. In this case, the manufacturer 
will carry no inventory and the retailer will carry an average inventory of 
Q/2 as before. Synchronization of replenishment orders allows the supply 
chain to lower total cycle inventory from about 3Q/2 to Q/2 in this case.