Differentiating customer service on the basis of delivery lead-times Presented by: Y. Levent Kocaga

content Problem description Relevant literature Detailed analysis My further research Conclusions

Problem description Focuses on a distribution system providing two classes of service The two classes differ in their demand lead-times Demand lead-time refers to the time elapsed between arrival of a demand and its fulfillment

Problem description Based on a paper by Wang, Cohen and Zheng (2002) Observed in a semi-conductor equipment manufacturer producing online testers Testers are used in capital-intensive manufacturing environments Parts are subject to random failure Focus is on these repairable service parts

Problem description The firm has a two-class service policy Emergency service Non-emergency service The non-emergency service is slower with a substantially lower price Customers have the flexibility to choose depending on their trade-off

Problem description The firm uses a two-echelon service network consisting of A central repair depot (CD) Distribution centers holding parts inventory to serve customers in their respective regions and replenish inventory from CD Returned defectives are relayed to CD

Problem description: operation of the two service classes When an emergency customer arrives at a DC: The DC satisfies/backlogs the customer immediately At the same time DC places an emergency replenishment order with the CD

Problem description: operation of the two service classes When a non-emergency customer arrives at a DC: DC does not satisfy/backlog the customer until a demand lead-time DC places a non-emergency replenishment order with the CD CD fills the non-emergency order in a just- in-time fashion to meet the demand at DC

Problem description: service parts logistic network Depot Repair Center 0 12N Distribution Centers Customer arrivals Customer arrivals Customer arrivals Depot inventory center Good part Defective

Related literature Scarf (1958) Single location service parts system with only emergency class orders Observes that the replenishment process is equivalent to a M/G/∞ queue Palms theorem (1938) is applicable Sherbrooke and Feeney (1966) Extends the model allowing compound Poisson

Related literature Sherbrooke (1968) The pioneering work METRIC Nahmias (1981) Axsater (1993) Wang et al. (2000)

Related literature Simpson (1958) Uses the term service time for a base stock multi-echelon prod’n system Hariharan and Zipkin (1995) Give the name demand lead-time to describe inventory/distribution systems where customers allow a fixed time delay for order delivery Key observation is that the existence of a demand lead-time reduces the replenishment lead-time thereby decreasing the required inventory to achieve a target service level.

Related literature Moizadeh and Aggarwal (1997) consider a two echelon network with two modes of replenishment The two classes differ only in their transportation lead-time from CD to DC All orders are satisfied on a FCFS basis regardless of their class Different from the model I consider which satisfies orders by first-due-first-serve (FDFS)

Related literature Inventory rationing literature Ha (1997) Nahmias and Demmy (1998) Deshpande et al. (2000) When the inventory level drops below a certain level orders from the low priority items are rejected Sharply different than investigated model where customer differentiation is based on demand lead-time

Analysis A two echelon service parts network Two demand classes: emergency and non- emergency One-for-one replenishment under a base stock policy for both DC’s and the CD Poisson arrivals for both classes (iid across classes and DC’s) Ample repair capacity

Analysis Research questions: What is the level of inventory required to achieve a desired service level? How much savings can be achieved via the introduction of a non-emergency service? How does the demand lead-time and the ratio of demands affect system performance?

Analysis First a single location model is considered Transient and steady state performance measures are observed Inventory level distributions and random customer delays (service level) Then the analysis is extended to a two echelon system

Analysis Notation: T: Demand lead-time G i (.): Dist. function of replenishment lead- time W i (.): Dist. function of random delay A i,t (τ) : inventory reserved for a class i customer arriving at τ i=1,2

Analysis

Result: “Non-emergency service class will have a higher service level as long as there is a positive probability that the replenishment order corresponding to a class 2 demand is less than the demand lead-time”

Analysis Furthermore an optimization study is conducted. As a result substantial savings are incurred with the introduction of a non- emergency service due to the reduced inventory.

Issues to consider Generalizations of the assumptions Multiple demand classes with different demand lead-times Correlated demand or replenishment lead- times Pricing issues Price elasticity of demand

My further research Incorporate rationing to the existing model with emergency and non-emergency demand classes With a given level of base stock could the joint policy result in better service levels? Given service levels (as a constraints) will the joint policy result in a lower inventory cost? Flexible demand lead-times!

My further research How to proceed? Starting with a simple location model try to find performance measures  For convenience begin with fixed demand lead times and replenishment lead-times Generalize the assumptions as far as possible!

Conclusions The model is applicable in many industries Differentiating customer service on the basis of delivery lead times is an effective way of reducing inventory For a given stock level the single location model results in a better service level for non- emergency customers! Combining it with rationing policies could be the most efficient way to control inventory. Therefore there is still work to be done…

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