Improving Supply Chain

Improving Supply Chain Performance through Coordinated Inventory Control

Christian Larsen∗ and Anders Thorstenson October 21, 2009 CORAL – Centre for Operations Research Applications in Logistics Dept. of Business Studies, Aarhus School of Business, Aarhus University Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark

Abstract

Effective and efficient inventory control is an essential part of good supply chain management (SCM). However, obtaining such inventory control is not a trivial task. It requires insights into the workings of multi-stage inventory systems with uncertainty about future demand. In addition, it requires sharing of information and coordination of control between supply chain partners. In this article we outline the basic principles of inventory control in a supply-chain setting. Using simple examples we show the effects of applying inventory control principles that take the structure of the supply chain into account for coordination purposes. First, we find the overall minimum inventory investment and its associated stock allocations required to fulfil a given fill-rate target for end customer demand. Then we compare these results with the corresponding simple solutions obtained when inventories in the supply chain are controlled independently of each other. The conclusion is that coordinated inventory control offers significant potential for cost reductions in a supply chain. Furthermore, the resulting optimal fill-rate levels at upstream inventories are not immediately obvious without the analysis of the coordination effects. Keywords: Collaborative inventory control, Multi-stage inventory systems, Stochastic demand, Supply chain coordination

∗

Corresponding author: e-mail: chl@asb.dk

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1. Background

The network structure of a supply chain can take several different forms. Three basic structures are shown in Figure 1.

Series (line) structure

Assembly (convergent) structure

Distribution (divergent) structure

Figure 1: Three...