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Inventory Analytics - Prescriptive Analytics in Supply Chains

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Horst Tempelmeier

Inventory Analytics
Prescriptive Analytics in Supply Chains

Third Edition
Prof. Dr. Horst Tempelmeier

University of Cologne
Dep. of Supply Chain Management and Production
Albertus-Magnus-Platz
D-50923 Koeln
Germany
http://www.scm.uni-koeln.de
tempelmeier@wiso.uni-koeln.de

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prosecution under the German Copyright Law.
Publishing and production: Books on Demand GmbH, Norderstedt
ISBN 978-3-7519-3071-0

© 2006, 2011, 2020 Horst Tempelmeier

Table of Contents

Chapter A Production Planning and Inventory Management 1

Chapter B General Issues in the Analysis of Supply Networks 5

B.1 Elements of a Supply Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B.2 Sources of Uncertainty in a Supply Network . . . . . . . . . . . . . . . . . . . . . . . 8
B.3 Modeling of Supply Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
B.3.1 Basic definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
B.3.2 Modeling of the Time Axis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
B.3.3 Inventory-Related Performance Indicators . . . . . . . . . . . . . . . . . . . . 17
B.3.3.1 Performance Measures Related to a Single Product . . . . . . . . . . . . 18
B.3.3.1.1 α Service Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B.3.3.1.2 β Service Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B.3.3.1.3 γ Service Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
B.3.3.1.4 Duration of a Stock-out Situation . . . . . . . . . . . . . . . . . . . 20
B.3.3.1.5 Order Reliability Window . . . . . . . . . . . . . . . . . . . . . . . 22
B.3.3.1.6 Customer Order Waiting Time . . . . . . . . . . . . . . . . . . . . 24
B.3.3.2 Performance Measures Related to a Group of Products . . . . . . . . . . 27
B.3.3.3 Customer-Class Specific Performance Criteria . . . . . . . . . . . . . . . 30
B.3.4 The Performance Indicator Inventory Run-Out Time“ . . . . . . . . . . . . . . 32
”
B.3.5 The Demand During the Risk Period . . . . . . . . . . . . . . . . . . . . . . . 33
B.3.5.1 Deterministic Lead Times . . . . . . . . . . . . . . . . . . . . . . . . . . 34
B.3.5.2 Random Lead Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
B.3.5.3 The Influence of the Probability Distribution of the Replenishment Lead
Time on Costs and Service . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter C Single-Level Inventory Policies 43

C.1 Approximate Analysis of Selected Inventory Policies . . . . . . . . . . . . . . . . . . 45
C.1.1 (s, q) Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
C.1.1.1 Continuous Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
C.1.1.2 Periodic Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
C.1.1.3 Simultaneous Optimization of Order Quantity and Reorder Point . . . . . 60
C.1.2 (r, s, q) Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
 VI Contents

C.1.3 (r, S) Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

C.1.4 (s, S) Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
C.1.5 Comparison of the Inventory Policies . . . . . . . . . . . . . . . . . . . . . . . 80
C.2 Exact Analysis of Selected Inventory Policies . . . . . . . . . . . . . . . . . . . . . . 82
C.2.1 A Single Opportunity for Replenishment: The Newsvendor Problem . . . . . . 82
C.2.1.1 Model without Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . 82
C.2.1.2 Model with Fixed Costs: Single-Period (s, S) Policy . . . . . . . . . . . . 85
C.2.2 (s, q) Policy with Poisson Distributed Demand and Continuous Review . . . . . 87
• Note 1: Normal Approximation of the Lead Time Demand . . . . . . . . 93
• Note 2: Periodic Review . . . . . . . . . . . . . . . . . . . . . . . . . . 94
C.2.3 Base-Stock Policy with Poisson Demand and Continuous Review . . . . . . . . 96
C.2.4 Customer Order Waiting Time Distribution for a Base-Stock Policy in Discrete
Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
C.3 Two Customer Classes: Regular and Priority Customers . . . . . . . . . . . . . . . . . 100
C.4 Multiple Order Size Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
C.5 The Effect of the Inventory Performance on Subsequent Logistical Processes . . . . . . 103
C.5.1 Safety Stock versus Transportation Capacity . . . . . . . . . . . . . . . . . . . 103
C.5.2 Inventory-related Waiting Time versus Transportation Time . . . . . . . . . . . 107
C.5.3 Waiting Time Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
C.6 Modeling the Supplier as a Queueing System . . . . . . . . . . . . . . . . . . . . . . 111
C.6.1 Make-to-Order Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
C.6.2 Make-to-Stock Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
C.6.2.1 Production Node with Unlimited Capacity . . . . . . . . . . . . . . . . . 115
C.6.2.2 Production Node with Limited Capacity . . . . . . . . . . . . . . . . . . 117
C.7 Spatial Pooling of Inventory: The Square Root Formula . . . . . . . . . . . . . . . . . 120

Chapter D Analysis of Multi-Level Supply Networks 121

D.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
D.2 The Bullwhip Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
D.3 Multi-Level Inventory Policies with Local Control . . . . . . . . . . . . . . . . . . . . 128
D.3.1 Models for Divergent Systems . . . . . . . . . . . . . . . . . . . . . . . . . . 128
D.3.1.1 Poisson Demand in Continuous Time, Identical Regional Warehouses . . 131
D.3.1.2 General Demand in Continuous Time, Non-Identical Regional Warehouses 137
D.3.1.3 General Demand in Discrete Time, Non-Identical Regional Warehouses . 145
D.3.1.4 General Demand in Discrete Time, Non-Identical Regional Warehouses,
Customer Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
D.3.2 Models for Systems with General Structure . . . . . . . . . . . . . . . . . . . 155
D.3.3 Concluding Remarks with Respect to Systems with Local Control . . . . . . . 156
Contents VII

D.4 Multi-Level Inventory Policies with Central Control . . . . . . . . . . . . . . . . . . . 158

D.4.1 The Concept of Echelon Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 158
D.4.2 Models with Internal Waiting Times . . . . . . . . . . . . . . . . . . . . . . . 164
D.4.3 Models without Internal Waiting Times . . . . . . . . . . . . . . . . . . . . . . 168
D.5 Vendor-Managed Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

Chapter E Dynamic Lot Sizing under Uncertainty 175

E.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
E.2 Dynamic Single-Item Lot Sizing with Random Demand . . . . . . . . . . . . . . . . . 177
E.2.1 Fixed Replenishment Periods, Fixed Lot Sizes . . . . . . . . . . . . . . . . . . 178
E.2.1.1 Backorder Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
E.2.1.1.1 Shortest-Path Model . . . . . . . . . . . . . . . . . . . . . . . . . . 180
E.2.1.1.2 Piecewise Linear Model . . . . . . . . . . . . . . . . . . . . . . . . 182
E.2.1.2 Service Level Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . 185
E.2.1.2.1 Cycle αc Service Level . . . . . . . . . . . . . . . . . . . . . . . . 186
E.2.1.2.2 Horizon βτ Service Level . . . . . . . . . . . . . . . . . . . . . . . 187
E.2.1.2.3 Cycle βc Service Level . . . . . . . . . . . . . . . . . . . . . . . . 190
E.2.1.2.3.1 Piecewise Linear Model . . . . . . . . . . . . . . . . . . . . 190
E.2.1.2.3.2 Shortest-Path Model . . . . . . . . . . . . . . . . . . . . . . 191
E.2.1.2.4 Heuristic Solution Methods . . . . . . . . . . . . . . . . . . . . . . 195
E.2.2 Fixed Replenishment Periods, Variable Lot Sizes . . . . . . . . . . . . . . . . 198
E.2.2.1 Backorder Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
E.2.2.2 Service Level Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . 200
E.2.2.2.1 Cycle αc Service Level . . . . . . . . . . . . . . . . . . . . . . . . 200
E.2.2.2.2 Period αp Service Level . . . . . . . . . . . . . . . . . . . . . . . . 204
E.2.2.2.3 Cycle βc Service Level . . . . . . . . . . . . . . . . . . . . . . . . 205
E.3 Dynamic Single-Item Lot Sizing with Random Yield . . . . . . . . . . . . . . . . . . 207
E.4 Stochastic Dynamic Multi-Item Capacitated Lot Sizing . . . . . . . . . . . . . . . . . 212
E.4.1 Solution Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
E.4.1.1 Using a Standard MIP-Solver . . . . . . . . . . . . . . . . . . . . . . . . 215
E.4.1.2 ABCβ Heuristic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
E.4.1.3 Column Generation Heuristic . . . . . . . . . . . . . . . . . . . . . . . . 223
E.4.1.4 Fix-and-Optimize Heuristic . . . . . . . . . . . . . . . . . . . . . . . . . 230
E.5 Consideration of Randomness in Business Practice . . . . . . . . . . . . . . . . . . . 235
E.5.1 Ignore Capacity Constraints and Randomness . . . . . . . . . . . . . . . . . . 236
E.5.2 Deterministic Capacitated Dynamic Lot Sizing and Randomness . . . . . . . . 237
E.5.2.1 Capacitated Dynamic Lot Sizing with Safety Stock . . . . . . . . . . . . 238
E.5.2.2 Capacitated Dynamic Lot Sizing with Safety Stock and Backlogging . . . 239
 VIII Contents

E.5.3 Safety Lead Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

E.5.4 Overestimation of Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
E.5.5 Inventory Rationing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
E.5.6 Product Substitution and Cannibalization . . . . . . . . . . . . . . . . . . . . . 243
E.5.7 Freezing the Production Schedule . . . . . . . . . . . . . . . . . . . . . . . . . 244
E.5.8 Rescheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
E.5.9 Advance Order Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247

Bibliography 251

Index 261

List of Symbols 265

Appendix 271
Appendix 1: Normal Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
Appendix 2: Gamma Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
Appendix 3: Mixed Erlang Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Appendix 4: Derivation of an Integral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

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