Service levels, system cost and stability of production–inventory control systems

Abstract

Production-inventory control system models have been analysed in the literature either in terms of their stability against demand fluctuations or in terms of their service level and cost performance under uncertain demand. This article analyses the production-inventory system performance in terms of service level (i.e. order fill rate) and average system costs, under stable settings of the control parameters. The classical automatic pipeline variable inventory and order-based production control system has been modified by explicitly modelling safety stock to help achieve higher services levels in the face of random demand. The stability of the system is affected by the control parameters: fractional rates of adjustment of work-in-process and inventory. However, the service level and average cost are affected by the control parameters as well as the smoothing factor in demand forecasting. This article puts forward five propositions which give light to general system performance based on the parameters selection. Intensive simulation experiments have also been carried out to reveal the performance variations within the stable region, leading to further insights on the system behaviour. The managerial insights which can assist proper tuning of systems to help achieve the desired performances have been discussed.