Exploitation of material consolidation trade-offs in multi-tier complex supply networks

Abstract

While consolidation strategies form the backbone of many supply chain optimisation problems, exploitation of multi-tier material relationships through consolidation remains an understudied area, despite being a prominent feature of industries that produce complex made-to-order products. In this paper, we propose an optimisation framework for exploiting multi-to-multi relationship between tiers of a supply chain. The resulting formulation is flexible such that quantity discounts, inventory holding, and transport costs can be included. The framework introduces a new trade-off between tiers, leading to cost reductions in one tier but increased costs in the other, which helps to reduce the overall procurement cost in the supply chain. A mixed integer linear programming model is developed and tested with a range of small to large-scale test problems from aerospace manufacturing. Our comparison to benchmark results shows that there is indeed a cost trade-off between two tiers, and that its reduction can be achieved using a holistic approach to reconfiguration. Costs are decreased when second tier fixed ordering costs and the number of machining options increase. Consolidation results in reduced inventory holding costs in all scenarios. Several secondary effects such as simplified supplier selection may also be observed.