Contributions to multi-echelon safety stock optimisation can broadly be divided into models following either a stochastic-or guaranteed-service approach. These approaches form the basis of several commercial inventory optimisation software tools. To date, there is still a lack of a detailed comparison between the two approaches. This paper presents a cost comparison for two-stage distribution systems by means of a simulation study. The results indicate that the cost difference between the two approaches is quite small amounting to 4% at most. We observe that in most cases, the resulting (lower) internal warehouse service level is a good indicator for the superiority of an approach. The guaranteed-service approach shows a better performance for moderate flexibility costs, large warehouse processing times and high retailer service levels.
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.
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