Marziye's notes on Inventory Optimization

you should keep inventory when the backorder cost is higher than the holding cost over the review period. If not-since keeping a unit in stock is more expensive than missing one item in stock-you should use a make-to-order policy (i. e., produce only when a client makes an order) rather than a make-to-stock policy (produce and store goods in advance).

Vendor Managed Inventory (VMI) is a business model where the supplier of a product takes ownership of the stock its client holds. In practice, it means that the supplier is managing (and responsible for) its client inventory policy. In some cases the supplier can also own the inventory held at its client premises; it is then called consignment. VMI will realize its full potential if a supply chain is able to deploy a proper multi-echelon inventory optimization.

The stochastic-service model (SSM) analyzes the stochastic time it takes from one node to replenish another (based on its inventory level). The stochastic-service model is driven by internal service levels; whereas the guaranteed-service (time) model as- sumes that each node will always serve its clients within a fixed quoted time, assuming that the demand is bounded. The guaranteed-service model(GSM) is driven by internal guaranteed-service times (in other words, how much risk-period each node should cover). In short, where the SSM uses safety stocks as buffer against the entire demand variability (resulting in random lead times), the GSM assumes that safety stocks will be used until a certain demand threshold.

De Smet et al. (2018) saw that in most cases GSM would result in lower costs than SSM (depending on parameters such as service level), with an overall cost reduction of 10%; whereas Klosterhalfen and Minner (2010) showed that the difference between the two models was around 4% maximum depending on the supply chain features.