Abstract
Guaranteed-Service Approach (GSA) was used to set safety stock for multi-echelon inventory systems. This approach assumes that each stock can use operating flexibility measures such as expediting and overtime to fulfill excessive customer demand superior to a bound as a supplement to its safety stock. In this paper, we consider a continuous review assembly inventory system with Poisson final demand and fixed order costs at each stock controlled by a ( $R$ , $Q$ ) policy. We use the GSA to optimize the policy with the consideration of operating flexibility costs and fixed order costs. A deterministic mathematical programming model is established for the problem. And the model is solved by a line search for finding the optimal target cycle service level (CSL) to customer and an iterative procedure for solving the model when the target CSL is given. Moreover, we analyze the optimality conditions for the extended GSA model and obtain some important properties in given conditions. Numerical experiments on randomly generated instances demonstrate the efficiency of the procedure and confirm the solution presented in this paper.
Highlights
Effective management of inventories in a supply chain is critical for the firms in the chain to assure a high service level to their customers at the minimal costs
SENSITIVITY ANALYSIS From the experiment results, we identify three important drivers for the optimality of the cost structure: unit operating flexibility cost (p), an upper bound of the outbound service time at the end stock (s1) and the cycle service level (CSL) (α)
We used the extended guaranteed-service approach (GSA) to optimize the parameters of the policy under the assumption that excessive demand beyond a pre-specified bound will be fulfilled by using operating flexibility measures
Summary
Effective management of inventories in a supply chain is critical for the firms in the chain to assure a high service level to their customers at the minimal costs As such supply chain can be modeled as a multi-echelon inventory system, one important issue of its management is to find an optimal inventory policy of the system. Two competing approaches have emerged in multi-echelon inventory theory: stochasticservice approach (SSA) and guaranteed-service approach (GSA), which were introduced by [1] and [2], respectively. These two approaches differ in demand treatment and service time characteristics. The service time of the stock, which is defined as the lead time for
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