Finite inventory budgets in production capacity and safety stock placement under the guaranteed service approach

Inventory Positioning in Supply Chain Network: A Service-Oriented Approach

“…The solution to this model is obtained using a dynamic programming algorithm developed by Graves [10]. After that, Simpson's model [3] is extended to accommodate various practical supply chain settings through the studies of Graves and Willems [11], [12], [13], Humair and Willems [14], Funaki [15], Moncayo-Martınez and Zhang [16], Jiang et al [17], Aouam and Kumar [18], Ghadimi et al [19], Aouam et al [20].…”

“…This policy is often implemented for a periodic review system, where ordering costs can be minimized when orders are arranged and consolidated [26]. Therefore, a majority of researchers consider the base stock policy in their safety stock placement problems [11], [15], [16], [18], [19], [20], [27], [28].…”

“…In addition to inventory policy, another important assumption in the safety stock placement problem is the underlying assumption of the distribution for customer demand. To simplify the problem characteristic, most studies assume that the demand follows either a theoretical distribution, such as Normal [11], [25], [27], [14], [16], [28] [18], [19], [20], Poisson distribution [22], [23], [24], or a stochastic process, in which the demand still follows a normal distribution with a dynamic variance [12], [15]. Although these demand assumptions are widely applied in inventory management literature, they are well-known for the poor approximation of several real demand patterns, which are uncertain, intermittent, and unpredictable [29].…”

“…Given a demand distribution, the total demand during a replenishment cycle of a supply chain is split into two unequal parts. The larger part, referred to as bounded demand, is fulfilled by available inventory, while the smaller one, known as unbounded demand, is handled by operating flexibilities, such as accelerated production [19], and subcontracting [18], [20]. Under this demand-splitting scheme, the timing of fulfillment (or lead time) is always guaranteed.…”

“…In addition, since the bounded demand represents the fraction of total demand in a replenishment cycle that is satisfied by the inventory system, it implicitly determines the cycle service level of the supply chain. Therefore, many GSA studies determine the size of bounded demand by specifying a cycle service level, such as 90% [11], 95% [15], [16], [27], 97.5% [19], [20], or 97.7% [28]. It is conventional wisdom that service level is prescribed by either customers or managers.…”