Strategic Inventory Control in Capacity-Constrained Manufacturing Systems : Reviewing the tangible effect of applying multi-echelon optimization in a multi-product environment

Sammanfattning: Firms today maintain complex supply chains containing many dependent stages to manufacture a product to the end customer. Here lies a dilemma, keeping extensive inventory generate higher customer satisfaction by enabling quick deliveries. This increase in inventory, however, comes at an increase in costs. Finding the balance between minimizing costs and increasing customer satisfaction is difficult. The search to solve this dilemma has led to the development of research in the area of inventory control. For long, optimization models have been developed to improve the supply chain holistically, from raw material-to-customer. Those approaches, however, have not been possible to apply in practice by being too computationally demanding. Also, they imply organizational adjustments that create issues beyond the optimization flow of materials. It explains why, despite significant technolog- ical advancements, many firms prefer to use non-holistic approaches. This thesis evaluates the tangible effect of using holistic optimization. The objective of this thesis’ is to determine optimal stock levels between dif- ferent stages of production. The method used is an optimization of inventory, stemming from Inventory Control Theories. Inventory optimization is at the cross- roads between logistics, economics, and management. The thesis builds on a case of inventory optimization identified at a large manufacturing firm. The literature in inventory optimization has indicated that inventory and customer services is a domain of continuous development. This thesis focuses on the adequation between total inventory cost and the customer service level. The method used to answer this question is the Multi-Echelon optimization model. This model seeks to optimize reorder points and reorder quantities. A comparison to the Single-Echelon model and a Base-Case allows for evaluation of the performance, discrete event simulation based on a company’s supply chain measures the effect. The result shows that the Multi-Echelon optimization model outperforms the two non-holistic models. This thesis shows the triple advantages of the Multi-Echelon optimization allowing for leaner manufacturing system by 1- reduction of waste, 2- less unproductive capi- tal tied up in inventory, and 3- adding value by increasing customer satisfaction. Other areas of inventory optimization in manufacturing should be able to take ad- vantage of the Multi-Echelon optimization model to manage materials stock-levels, delivery flows, and customer satisfaction.