Strategic Safety Stock Placement in Supply Networks with Static Dual Supply

Abstract

Many real-world supply networks source required materials from multiple suppliers. Existing multiechelon inventory optimization approaches either restrict their scope to multiple supply sources in two-echelon systems or single suppliers in multiechelon systems. We develop an exact mathematical model for static dual supply in a general acyclic N-echelon network structure, which builds on the guaranteed-service framework for safety stock optimization. It is assumed that the suppliers are allocated static fractions of demand. We prove that for normally distributed demand an extreme point property holds. We present a real example from the industrial electronics industry consisting of five echelons and three dual-sourced materials. This example forms the basis for a numerical analysis. Compared with the only previously published approximate solution, our exact approach results in considerable cost savings because the exact model captures inventory pooling in a way that the approximation is unable to do. For a set of test problems, total safety stock cost savings are 9.1%, on average.