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Are Multi-Echelon Inventory Methods Worth Implementing in Systems with Low-Demand-Rate Items?

Author

Listed:
  • John A. Muckstadt

    (Cornell University)

  • L. Joseph Thomas

    (Cornell University)

Abstract

In practice, most multi-echelon inventory systems are managed using adaptations of single location methods. This paper shows that such methods can be dramatically inferior to methods designed to take advantage of a system's structure. This is especially true in repair parts inventory systems where most items have low demand rates. In this paper we describe a multi-echelon method adapted to a particular situation. Data taken from a large (over $100 million investment) industrial inventory system are used to provide comparative results on overall inventory required to meet a given service level. The multi-echelon method used involves an (s - 1, s) ordering policy and Poisson demand, both of which are appropriate for low demand items; this method requires much lower total investment than the single-location method requires to achieve the same average level of performance. Thus it appears that multi-echelon methods are worthwhile in many situations.

Suggested Citation

  • John A. Muckstadt & L. Joseph Thomas, 1980. "Are Multi-Echelon Inventory Methods Worth Implementing in Systems with Low-Demand-Rate Items?," Management Science, INFORMS, vol. 26(5), pages 483-494, May.
    • Handle: RePEc:inm:ormnsc:v:26:y:1980:i:5:p:483-494
    DOI: 10.1287/mnsc.26.5.483
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