Two-Echelon Spare Parts Inventory System Subject to a Service Constraint ∗ Deniz Caglar † Chung-Lun Li ‡ David Simchi-Levi § February 2002 Revised December 2002 Abstract In this paper, we consider a spare parts inventory problem faced by a manufacturer of elec- tronic machines with expensive parts that are located at various customer locations. The parts fail infrequently according to a Poisson process. To serve customers when a failure occurs, the manufacturer operates a central warehouse and many field depots that stock spare parts. The central warehouse acts as a repair facility and replenishes stock at the field depots. There is a centralized decision maker who manages the inventory in both the central warehouse and the field depots. We develop a continuous review, base stock policy for this two-echelon, multi-item spare parts inventory system. We formulate a model to minimize the system-wide inventory cost subject to a response time constraint at each field depot. We present an efficient heuristic algorithm and study its computational effectiveness. * Research supported in part by ONR Contracts N00014-95-1-0232 and N00014-01-1-0146, and by NSF Contracts DMI-9732795 and DMI-0085683. † Booz-Allen & Hamilton, Chicago, IL ‡ Department of Management, The Hong Kong Polytechnic University, Kowloon, Hong Kong § Corresponding author; Engineering Systems Division and Department of Civil and Environmental Engineering, Massachusetts Institute of Technology, Cambridge, MA 02139-4307 This is the Pre-Published Version.