Using pipeline information in a multi-echelon spare parts inventory system - a time limited backorder model

Motivated by collaboration with a global spare parts service provider, we consider a two-echelon inventory system with multiple local warehouses, a so-called support warehouse, and a central warehouse with ample capacity. In case of stock-outs, the local warehouses can receive emergency shipments from the support warehouse or the central warehouse at an extra cost. The focus is on using information on orders in the replenishment pipeline, i.e. pipeline information, to achieve cost efficient policies for requesting emergency shipments. We introduce a policy where the request for an emergency shipment is based on the time until an outstanding order will reach the stock point considered. The Goal is to determine how long one should wait for stock in the replenishment pipeline, before requesting an emergency shipment, and the cost effects of using pipeline information in this manner. In our analysis we utilize results from queuing theory and provide a decomposition technique that reduces a complex multi-echelon problem to more manageable single-echelon problems. Our results indicate that there is a significant benefit in using pipeline information. Based on data provided by the case company, we illustrate that the relative cost increase of ignoring pipeline information can be as high as 106%