On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

1© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the

Determination of Value-added ServicesAndreas Rutsch, CUT, Department of Factory Planning and Factory Management

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

• the alignment of scale- and scope- with inventory pooling- and postponement economies

• an issue of capability engineering concerning the provision of Value-Added Services VAS

• the trade-off between transaction costs and the diversification of products and related VAS

• the ability to increase total economic surplus creating the market gap for new business blueprints

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• …

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Objectives

2© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

• the value chain is given and fixed

• source and destination markets of products are set a priori and remain the same

• expecting a single point of control

• all product demands request the same VAS

• a particular VAS is already present

• distribution of demand per market is known

• a rooted tree

• transportation between echelons is always considered as full foad

• no overall weight-increasing or overall weight-losing VAS

• continuous replenishment

• the value chain can be appropriately described by its inherent lead times

• inventory stock savings resulting from the economies of inventory management are benchmarked against everything direct to shelf

• inventory is interrelated with risk

Model Assumptions

3© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

Economies of inventory management, being composed of economies of postponement and pooling, only reflect to inventories/stock levels of a product requesting the same value-added service. Economies of postponement (centrifugal tendencies) are functions of each customer’s order cycle/ customer order decoupling point, its requested service level (the probability that a demand can be met from stock), and the equivalent demand. By contrast [I]nventory pooling economies are centripetal forces, if customer’s order cycle is bigger than logistics lead time to realize demands. If customer’s order cycle is smaller than logistics lead time the resulting force is centrifugal, hence the occurring lead-time gap consists of postponement economies. Both, [P]ooling and postponement economies, could result in safety stock savings.

Model Assumptions (continued)

4© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

Index set of the presented demand pattern:

Safety stock, if required, is being placed close to demand a,bdj,k,m:

Total safety stock for scenario #1 can be constituted as:

A Primary Use Case – Scenario #1 (benchmark)

5© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

In scenario #2 inventory pooling happens as soon as possible along the value chain. Therefore, eachId = {(j,k,m)} defines a new index subset:

From (8) the location of stock is according to:

This leads to a new index set, stating the echelons where known demand can be realized at the earliest:

A Primary Use Case – Scenario #2 (pure pooling)

6© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

A Primary Use Case – Scenario 3 (pooling w/ postp., pure postp., postp. w/ pooling)

7© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

• there are more economies of pooling than vice versa

• slope of pure postponement for this use case is smaller for all an than for pure pooling

• it takes an = 12 product options for ‘postponement with pooling’ to outpace the effect of pure pooling

• greatest economies can be established through facilitating all options available for pooling

Discussion of Results

8© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

• this primary use case aims to validate the initial point of a generic model

• economies of inventory management along global value chains are not thoroughly understood yet

• lead time reduction (not considered here) should also account for great economies and needs some further research

• understanding the economies provides the capacity to design VAS

• pooling and postponement can lead to a competitive edge

• a generic model is needed which provides a general theory about occurring economies within globally dispersed value chains

Conclusion

9© Andreas Rutsch, Chemnitz University of Technology

On the Economies of Inventory Management within Globally Dispersed Value Chains – A Provisional Model toward the Determination of Value-added Services ICOSCM 2011

10© Andreas Rutsch, Chemnitz University of Technology

Thank you for your attention.