An integrated guaranteed- and stochastic-service approach to inventory optimization in supply chains

Steffen T. Klosterhalfen, Daniel Dittmar and Stefan Minner

European Journal of Operational Research, 2013, vol. 231, issue 1, 109-119

Abstract: Multi-echelon inventory optimization literature distinguishes stochastic- (SS) and guaranteed-service (GS) approaches as mutually exclusive frameworks. While the GS approach considers flexibility measures at the stages to deal with stockouts, the SS approach only relies on safety stock. Within a supply chain, flexibility levels might differ between stages rendering them appropriate candidates for one approach or the other. The existing approaches, however, require the selection of a single framework for the entire supply chain instead of a stage-wise choice. We develop an integrated hybrid-service (HS) approach which endogenously determines the overall cost-optimal approach for each stage and computes the required inventory levels. We present a dynamic programming optimization algorithm for serial supply chains that partitions the entire system into subchains of different types. From a numerical study we find that, besides implicitly choosing the better of the two pure frameworks, whose cost differences can be considerable, the HS approach enables additional pipeline and on-hand stock cost savings. We further identify drivers for the preferability of the HS approach.

Keywords: Inventory; Multi-echelon; Guaranteed service; Stochastic service; Partitioning (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:231:y:2013:i:1:p:109-119

DOI: 10.1016/j.ejor.2013.05.032

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