Stocking Decisions for Low-Usage Items in a Multilocation Inventory System

Abstract

This research shows that organizations with a number of “sister” plants, warehouses, or other stocking points can profit from the concept of proactive use of transshipments as an element of their inventory control policy. For certain types of parts, employing transshipments can significantly reduce the total inventory needed throughout the entire collection of stocking points. The study is motivated by a real-life situation involving a large utility company having 29 power-generating plants in five Southeastern states where there are thousands of parts that are commonly used at multiple plants. At present, each plant operates independently and maintains enough stock to meet its own requirements. Transshipments take place between plants whenever there is an emergency requirement for a part, but no explicit consideration is given to this effect while deciding on stocking levels at different plants. In the case we examined, by setting stocking levels to explicitly take account of transshipments, total system cost could be reduced by about 70% over the company's decentralized policy. In general, this work considers a single-echelon, N-location, continuous-review inventory system in which complete pooling of stock is permitted among the locations. A model is developed for slow-moving, expensive, and consumable parts that are common to two or more locations. A one-for-one ordering policy and queueing theory allow development and solution of a system of equations for the probability distribution of net inventory at each location. A heuristic procedure is also developed to determine cost-effective stocking levels. Actual data from the utility company are used to demonstrate the applicability of the model. Savings achieved as a result of pooling are reported.