System dynamics simulation‐based model for coordination of a three‐level spare parts supply chain

Abstract

AbstractIn some spare parts distribution systems for consumption goods, a portion of consumers’ demand is met by inventories in maintenance outlets, while the remaining portion is satisfied with emergency orders from the supplier, which can enhance customers’ satisfaction but cause added order‐processing costs and transportation costs. Faced with the trade‐off between the supplier's and outlet's profits, it is highly crucial to design and coordinate a supply chain in a way that determines to what extent each level should hold inventories by considering classification of spare parts. Therefore, in this paper, a system dynamics approach is used to design a three‐level supply chain simulation model consisting of one business unit, one distribution center, and one maintenance outlet. The business unit and distribution center belong to one company, so we consider them as one supplier. Therefore, we focus on the coordination between the distribution center and the maintenance outlet. The objective is to propose a contract to enhance these two parties’ profits. Through numerical analysis, we provide a contract with which the spare parts in class A are differentiated in their normal and emergency procurement prices and the spare parts in class B and class C have a prescribed customer service level. Using this type of contract, both distribution center's and maintenance outlet's profits can be enhanced, and the management process can be simplified.