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Evaluation of emergency ordering policies at Syncron

Jonsson Åberg, Niklas and Theander, Staffan (2017) MIO920
Production Management
Abstract
The aim of our research has been to identify what prevents Syncron from
implementing a single item emergency ordering policy in their inventory
management system, GIM. Emergency ordering is defined here as the ability to
use two supply sources, a normal one and a faster more expensive emergency
source. We further wanted to investigate under what circumstances an
emergency ordering policy could be used and what the benefits of such a policy
would be in comparison to Syncron´s current solutions.
To answer these questions, we first analyzed the company´s single item and
multi-item inventory control mechanisms. Second, we searched the academic
literature for emergency ordering polices that would be compatible with the
existing... (More)
The aim of our research has been to identify what prevents Syncron from
implementing a single item emergency ordering policy in their inventory
management system, GIM. Emergency ordering is defined here as the ability to
use two supply sources, a normal one and a faster more expensive emergency
source. We further wanted to investigate under what circumstances an
emergency ordering policy could be used and what the benefits of such a policy
would be in comparison to Syncron´s current solutions.
To answer these questions, we first analyzed the company´s single item and
multi-item inventory control mechanisms. Second, we searched the academic
literature for emergency ordering polices that would be compatible with the
existing system, and that would have the potential to reduce the costs while
retaining service levels. Third, the chosen models were tested against Syncron´s
current single and dual supplier ordering policies through a simulation study.
The primary obstacles preventing Syncron from implementing an
emergency ordering policy is their multi-item optimization algorithm. The
target of this algorithm is to obtain a certain overall service level while
minimizing the total stock value. The problems of this, in the context of
introducing an emergency ordering policy from academic literature, are primary
twofold. First, making a total cost optimization, where the extra cost for the
emergency replenishment option is weighted against the reduction in inventory,
is not supported. Second, most emergency ordering policies in literature utilize
a backorder cost instead of a service level requirement and the translation
between these concepts is often unsatisfactory.
Given these limitations there were few feasible models to evaluate. A
compromise was made to select two cost optimizing policies that could cut
costs significantly if Syncron would make larger changes, and two heuristics
which were tailor-made to fit the the current situation, but which lacked the
cost optimizing feature.
The chosen policies were
• The model in Song and Zipkin (2009) for items with Poisson
demand,
• an adaption of Roslings (2002) Lost Sales model for fast and erratic
items that is referred to in Axsäter (2006),
• a short horizon emergency heuristic with a Cost/Service level ratio
limit for items with fast and erratic demand and,
• a long horizon emergency heuristic with a Cost/Service level ratio
limit for items with fast and erratic demand.
The most important result of our simulation study is that a simple single
supplier (R, Q) policy outperformed all the non-optimizing policies, including
Syncron´s rush ordering heuristic, under the real conditions tested. Our
simulation study further showed that both the model by Song and Zipkin
(2009) and the lost sales model performed better than both Syncron´s current
solutions, given that all requirement for these policies were met.
Our tailor-made solutions performed only slightly better than Syncron´s
rush ordering heuristics under the real conditions. Our sensitivity analysis
showed that, under conditions that are attractive for emergency ordering in
general, the short horizon emergency heuristic performed better than both
Syncron´s policies.
Our recommendation to Syncron is to use more caution before enabling the
existing rush ordering heuristic for a customer. In most cases this heuristic will
do more harm than good. We further encourage Syncron to investigate whether
the tailor-made polices can have more apparent benefits in a multi-item setting,
where a Cost/Service level ratio limit can be set for a group of items. This would enable the filtering out of items not suited for emergency ordering. (Less)
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author
Jonsson Åberg, Niklas and Theander, Staffan
supervisor
organization
course
MIO920
year
type
M1 - University Diploma
subject
other publication id
16/5562
language
English
id
8903182
date added to LUP
2017-02-14 16:02:21
date last changed
2017-02-14 16:02:21
@misc{8903182,
  abstract     = {The aim of our research has been to identify what prevents Syncron from
implementing a single item emergency ordering policy in their inventory
management system, GIM. Emergency ordering is defined here as the ability to
use two supply sources, a normal one and a faster more expensive emergency
source. We further wanted to investigate under what circumstances an
emergency ordering policy could be used and what the benefits of such a policy
would be in comparison to Syncron´s current solutions.
To answer these questions, we first analyzed the company´s single item and
multi-item inventory control mechanisms. Second, we searched the academic
literature for emergency ordering polices that would be compatible with the
existing system, and that would have the potential to reduce the costs while
retaining service levels. Third, the chosen models were tested against Syncron´s
current single and dual supplier ordering policies through a simulation study.
The primary obstacles preventing Syncron from implementing an
emergency ordering policy is their multi-item optimization algorithm. The
target of this algorithm is to obtain a certain overall service level while
minimizing the total stock value. The problems of this, in the context of
introducing an emergency ordering policy from academic literature, are primary
twofold. First, making a total cost optimization, where the extra cost for the
emergency replenishment option is weighted against the reduction in inventory,
is not supported. Second, most emergency ordering policies in literature utilize
a backorder cost instead of a service level requirement and the translation
between these concepts is often unsatisfactory.
Given these limitations there were few feasible models to evaluate. A
compromise was made to select two cost optimizing policies that could cut
costs significantly if Syncron would make larger changes, and two heuristics
which were tailor-made to fit the the current situation, but which lacked the
cost optimizing feature.
The chosen policies were
• The model in Song and Zipkin (2009) for items with Poisson
demand,
• an adaption of Roslings (2002) Lost Sales model for fast and erratic
items that is referred to in Axsäter (2006),
• a short horizon emergency heuristic with a Cost/Service level ratio
limit for items with fast and erratic demand and,
• a long horizon emergency heuristic with a Cost/Service level ratio
limit for items with fast and erratic demand.
The most important result of our simulation study is that a simple single
supplier (R, Q) policy outperformed all the non-optimizing policies, including
Syncron´s rush ordering heuristic, under the real conditions tested. Our
simulation study further showed that both the model by Song and Zipkin
(2009) and the lost sales model performed better than both Syncron´s current
solutions, given that all requirement for these policies were met.
Our tailor-made solutions performed only slightly better than Syncron´s
rush ordering heuristics under the real conditions. Our sensitivity analysis
showed that, under conditions that are attractive for emergency ordering in
general, the short horizon emergency heuristic performed better than both
Syncron´s policies.
Our recommendation to Syncron is to use more caution before enabling the
existing rush ordering heuristic for a customer. In most cases this heuristic will
do more harm than good. We further encourage Syncron to investigate whether
the tailor-made polices can have more apparent benefits in a multi-item setting,
where a Cost/Service level ratio limit can be set for a group of items. This would enable the filtering out of items not suited for emergency ordering.},
  author       = {Jonsson Åberg, Niklas and Theander, Staffan},
  language     = {eng},
  note         = {Student Paper},
  title        = {Evaluation of emergency ordering policies at Syncron},
  year         = {2017},
}