TWO-LEVEL INVENTORY OPTIMIZATION UNDER PROBABILITY EVENT CHAIN

Abstract

The paper introduces the concept of effective inventory level, which is used to evaluate the impact of upstream shortage on downstream inventory, models the inventory at warehouse and retailer under random lead time and demand, and makes the global optimization of the safety factor to minimize channel inventory cost. It is shown that optimization and coordination of the safety factor lead to inventory cost savings at two sites, especially under large lead time variability and stock value-adding rate. Presented also is the coordination mechanism of the global optimization of the safety factor, i.e., cost-sharing contract, which allows both supplier and buyer to benefit from the program. Finally, this paper makes sensitivity analyses on the key parameters of the global optimization scheme. The numerical results obtained in our work differ from those of Lee and Billington (1995) that only consider demand variability and Bookbinder and others (1999) that only consider supply variability.


JMDMES Vol.2(1) 2003: 39-53