Production, Manufacturing and Logistics
Cost-effective inventory control in a value-added manufacturing system

https://doi.org/10.1016/j.ejor.2008.04.001Get rights and content

Abstract

This paper considers the cost-effective inventory control of work-in-process (WIP) and finished products in a two-stage distributed manufacturing system. The first stage produces a common WIP, and the second stage consists of several production sites that produce differentiated products with different capacity and service level requirements. The unit inventory holding cost is higher at the second stage. This paper first uses a network of inventory-queue model to evaluate the inventory cost and service level achievable for given inventory control policy, and then derives a very simple algorithm to find the optimal inventory control policy that minimizes the overall inventory holding cost and satisfies the given service level requirements. Some managerial insights are obtained through numerical examples.

Section snippets

Introduction and literature review

We consider a distributed manufacturing system that consists of two production stages (Fig. 1). The first production stage produces a common important component with limited capacity, and the second stage is a differentiation stage that consists of several stations which produce different finished products, taking the output of first stage and other possible components as their raw materials. External demands for those finished products follow different stochastic processes, with different

Problem description

The two-stage distributed manufacturing system (Fig. 1) studied in this paper consists of n+1 production nodes (facilities), with node 0 in stage 0 and nodes 1,2,,n in stage 1. Each node in the system consists of three parts, an input buffer, a server and an output store. Node 0 takes raw materials from external resource, processes them, and unloads them as WIP to its output store. Other nodes in the system take the WIP as raw materials and deliver to their own output stores after processing.

Performance evaluation of the system with any given base-stock setting R

Because of the complexity of the simultaneous consideration of inventory control and queueing, the exact evaluation of this system is very difficult, if not impossible. We will extend the inventory-queue decomposition method developed for serial system by Liu et al. [11] to this distributed system. Let Ni be the job queue length at node i,ci be the inventory holding cost of product i per time unit, i=0,,n. Let TC be the expected total inventory holding cost per time unit. Thenfi=Pr{Ni<Ri},i=1,2

The optimal inventory setting for any given service level requirement

Having obtained the approximation method for performance evaluation for any given base-stock setting, this section is dedicated to finding the optimal base-stock levels, Ri,i=0,1,,n, to meet any given service level requirement fr=(f1r,f2r,,fnr), at minimum inventory cost. Recall that, when all characteristics other than base-stock levels are fixed in this system, E[H0] is a function of R0 and is determined by R0 only. For any i=1,,n, since distribution of Ni is determined only by R0,E[Hi]=E[

Numerical examples and managerial insights

We consider a two-stage split system with n=2 and use it to investigate the relationships of optimal total cost with other system attributes.

Conclusion

In this paper, we propose a simple yet accurate approximation method to study the two-stage split system, with only one server at every station operating under base-stock inventory control policy. We adopt the common used “expected total inventory cost” and “fill rate” to measure the performance of the system. The former is used to measure the system cost, and the later is used to measure the customer service level. By establishing some monotone properties about inventory cost and fill rate, we

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Both authors are supported by University of Macau through a Grant RG052/04-05S/LZT/FBA.

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