Customer Differentiated End-of-Life Inventory Problem

Morteza Pourakbar and Rommert Dekker

No EI 2011-21, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: This paper deals with the service parts end-of-life inventory problem in a circumstance that demands for service parts are differentiated. Customer differentiation might be due to criticality of the demand or based on various service contracts. In both cases, we model the problem as a finite horizon stochastic dynamic program and characterize the structure of the optimal policy. We show that when customers are differentiated based on the demand criticality then the optimal structure consists of time and state dependent threshold levels for inventory rationing. In case of differentiation based on service contracts, we show that in addition to rationing thresholds we also need contract extension thresholds by which the system decides whether to offer an extension to an expiring contract or not. By numerical experiments in both cases, we identify the value of incorporating such decisions in service parts end-of-life inventory management with customer differentiation. Moreover, we show that these decisions not only result in cost efficiency but also decrease the risk of part obsolescence drastically.

Keywords: customer differentiation; end-of-life inventory; spare parts (search for similar items in EconPapers)
Date: 2011-06-30
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Journal Article: Customer differentiated end-of-life inventory problem (2012)
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