Reducing inventory investments in capital intensive industries
Within capital intensive industries, companies are constantly balancing high availability of assets against minimising costs. For example, due to the high costs of airplanes, every minute a plane is on the ground money is lost. In order to reach high asset utilisation, stocking reliable spare parts (modular components) and fast replacement procedures are important prerequisites. Managing spare part inventories, often spread across multiple warehouses, is crucial in this process.
Logistic Service Providers (LSP), who are responsible for spare part availability (e.g. KLM who provides parts to other airline companies), usually operate under criteria captured in complex and elaborate service level agreements. Time based service levels are such an example (e.g. "deliver 95% of the parts asked for within 72 hours"). Next to this, the fact that customers of these LSPs are usually geographically spread, each having multiple warehouses with their own specification of stock levels, also adds to complexity.
The aim of this project was to develop an inventory optimisation model that can be used for planning target inventory levels for each item at each warehouse that deals with both SLA and costs constraints.
Traditional inventory optimization techniques use the so called instantaneous fill rate as dominant performance measure. For organizations operating under strict time based service levels, instantaneous fill rate techniques are less adequate. In such a situation the focus must be on time based fill rates, explaining the fraction of demand that can be fulfilled on time.
In a case study performed at KLM, we developed a simulation model that used time based measures. This model showed that, when operating under strict time constraints, the use of time based measures perform significantly better than models that use traditional performance measures. The use of the appropriate (time based) measures does not only save money, but also adds to supply flexibility.
Summarizing, this study enhanced insights in the relation between time based service levels and inventory optimization. By implementing time windows in inventory optimization, companies can directly reduce inventory investments, whereas the inappropriate use of instantaneous fill rates as performance measure will lead to overinvestment in inventories.
Keywords
Inventory management, warehouse management, spare part management, service level agreements, inventory costs, optimisation
Branches/Industries
Logistics Service Providers, Capital Intensive Industries, Airlines
Company
KLM