Inventory Allocation in the Presence of Service‐Level Agreements

Abstract

Retailers often use service‐level agreements (SLAs) to evaluate their supplier's performance. Based on an examination of 70 SLAs from practice, we conclude that in terms of evaluating fill rate, these SLAs vary in at least three key dimensions: (i) Supplier performance can be evaluated for each demand request or over some longer horizon, (ii) the acceptable fill rate can be 100% or something less than 100%, and (iii) the non‐compliance charge can be a flat fee, a per‐unit‐short fee, or both. For a supplier operating a periodic‐review inventory system and serving multiple retailers, each with an SLA, we investigate the impact of inventory allocation rules on SLA compliance and expected non‐compliance costs across the three dimensions of review horizon, fill rate target and non‐compliance cost structure. We derive several analytic results when retailers are symmetric. For the single‐period setting and a fill rate target of 100%, we characterize the optimal allocation rule and rank other rules common in practice and the literature. We also characterize the optimal rule for the single‐period setting when the fill rate target is less than 100% and the SLA specifies a flat‐fee non‐compliance charge. In the multiple‐period case, we characterize the optimal rule when the fill rate target is 100%. When the fill rate target is less than 100% and the performance review horizon is more than one period, we develop a simple heuristic that outperforms common allocation rules.

Effects of trust-based decision making in disrupted supply chains

“…There exists an extensive body of literature studying how suppliers allocate their inventory to multiple buyers (e.g. [16][17][18]) and how buyers split their orders among multiple suppliers (e.g. [19]).…”

Service level agreement directed to suppliers of materials and services of the petrochemical sector: a criteria analysis

“…Thus the aspect cost is not as important in this segment (Ritson et al, 2017). The maintenance of the efficient processes optimises its resources and adds value to its product or service, thus increasing the service level every client expects from their supplier (Chen and Thomas, 2017).…”

“…In several segments, clients usually use service level agreement (SLA) to outline performance expectations from their suppliers and determine the penalties in case the rules and requirements are not strictly met. Chen and Thomas (2017) emphasise that the SLA application can be efficient in the coordination and management of the supply chain, since these criteria will measure service quality as a whole. SLA assures the measurement of the services delivered by transforming these criteria into performance indexes for the suppliers' assessment (Muller et al, 2017).…”

“…In several sectors, the use of SLA is very common to describe the suppliers' performance expectations and specify the consequences of not following these rules. Such agreement may serve to encourage a supplier to improve the service delivered or the supply of the goods acquired without penalties or even additional benefits (Chen & Thomas, 2017).…”

“…SLA is very common in practise for the suppliers who manage goods in a wide variety of industries. Several articles show that the SLA non-compliance costs directly affect the suppliers' profitability (Chen & Thomas, 2017).…”