Inventory budget optimization: Meeting system-wide service levels in practice

The work described in the literature on inventory and supply chain management has advanced greatly over the last few decades and now covers many aspects and challenges of applied supply chain management. In this paper we describe an approach that combines many of these academic aspects in a practical way to manage the spare parts logistics at a German automobile manufacturer. The basic problem is a single-echelon inventory problem with a systemwide service-level requirement and the possibility of issuing emergency orders. There exist two related optimization problems: One is to maximize the system-wide service level under the constraint of a given budget; the other is to minimize the budget for a given system-wide service level. The most important requirements and constraints considered are a detailed cost structure, different packaging sizes, capacity constraints, several storage zones, the decision whether or not to stock a product, stochastic lead times, highly sporadic demands, and the stability of the optimization result over time. Our approach has been implemented successfully in an automotive spare parts planning environment. The complete solution package integrates into the mySAP ERP™, the SAP Enterprise Resource Planning system, and APO 4.0, the SAP Advanced Planning and Optimization system. A detailed description of the model is given and results are presented. © 2007 IBM.