Environmental and Economic Benefits of using Multi-Echelon Inventory Control

Abstract

Summary
This master thesis evaluates the benefits of using multi-echelon control
instead of single-echelon control of a multi-echelon inventory system. The
multi-echelon inventory system studied in this thesis is a one-warehousemultiple-
retailer inventory system. Multi-echelon inventory control is
defined as a method to optimize the inventory system by taking the
interdependencies between different stock locations in the system into
consideration. Single-echelon control on the other hand is defined as
optimizing each stock point in isolation and disregarding the
interdependencies that exists. There has been extensive research in this
area, and the fact that large potential cost reductions exist is well
documented. However, little research has been performed to evaluate the
environmental benefits that can be rendered by implementing multiechelon
inventory control.
The purpose of this master thesis is to evaluate the environmental and
economic benefits of using a more advanced multi-echelon control method
in a real case instead of the commercial single-echelon control method
currently used. The hypothesis is that by fulfilling the fill-rates better, the
amount of emergency orders can be reduced significantly, and by this also
the total CO2-emissions can be reduced.
The company studied is Lantmännen Maskin AB (LM) who provides their
retailers in Sweden, Norway and Denmark with spare parts for agricultural
machinery. The methodology used have been that of an operations research
study where both mathematical models and simulations have been used. As
a base model a commercial single-echelon model currently used at
Lantmännen Maskin has been used, called SCP in this thesis. This model
was compared to a more sophisticated multi-echelon model developed at
Production Management, Lund University, Faculty of Engineering by
Berling and Marklund (2012;2013), called MEM in this thesis. The
approach of the project can be divided into five steps; first the data from
the case company was gathered. Secondly, an existing simulation model
was extended to fit the needs of this study. Thirdly, a stratified sampling
was performed on the gathered data to find a representative sample of the
case company’s items. Fourthly, the inventory system was optimized with
SCP and MEM respectively. Finally, the results from the SCP-model and
the MEM-model was simulated and compared.
The results show that the average fill-rate was increased with 8.3% from
92.0% to 99.6%, the holding costs went down with 18.1% and the CO2-
emissions were reduced with 57.0%. Further, the MEM model shows to be
more consistent on achieving target fill-rate, whereas the SCP model varies
a lot and delivers some fill-rates which are well below target and some that
are above.
Sensitivity analysis of the results concerning the CO2-emissions shows that
for this case study the emergency orders sent by air do not affect the
system very much. The reason is that the emergency transports by air are
very few compared to the ones sent by truck. To really examine the
benefits that could be achieved with the MEM model compared to the SCP
model, a modified case set up was investigated where all emergency orders
were assumed to be sent by air. In this case the reduction of CO2-emissions
can be as high as 90%. Another important aspect found during this thesis
concerning the CO2-emissions is that certain item attributes can make some
items affect the CO2-emissions of the whole system in a non-proportional
way. Two important factors were found, weight and mean demand. All
CO2-emissions are linearly dependent on the weight, and consequently,
this is a very important factor. But the second factor has even more
influence. The reason for this is that if the mean demand for an item is high
compared to other items then this item can have relatively many
emergency orders even if the fill-rate is high. This was found during the
study where one item, which had a high fill-rate, emitted CO2-emissions
equivalent to 68% of the CO2-emissions of all of the studied items.
Consequently, the conclusion from the results is that implementing the
MEM model instead of the SCP model will reduce the environmental
impact. Further, there are other aspects which are important to consider;
firstly the MEM model will be more consistent on achieving target fillrates
than the SCP model, secondly the reduction of CO2-will be greater in
a system using air transport for emergency orders instead of land transport,
and finally, the weight and mean demand are important aspects to consider
if the environmental impact is to be reduced.

• author: Nilsson, Sven and Ottosson, Lina
• supervisor: Johan Marklund
• organization: Production Management
• course: MIO920
• year: 2013
• type: M1 - University Diploma
• subject: Technology and Engineering
• other publication id: 13/5461
• language: English
• id: 4024480
• date added to LUP: 2013-09-13 15:36:43
• date last changed: 2013-09-13 15:36:43