Determining inventory base stock levels of expendable spare parts under service level agreement for on-time delivery

Abstract

Availability of service parts is critical to have adequate equipment maintenance in order to avoid costs associated with unplanned shut downs, loss of production, and increase safety among others. Determining an adequate quantity of service parts to have is a challenging situation that companies have to deal with because service parts encompass intermittent demand; this type of demand is of variable size and occurring at irregular intervals. As consequence of the nature of service parts, companies have to have large quantities of parts in stock increasing their holding cost, or companies have to place expedited order to avoid late deliveries and avoid penalty fees. In this research, a model is developed in order to determine the inventory base level for all parts in order to minimize holding cost, penalty cost for late delivery and shipment cost while satisfying an agreed service level for on-time equipment delivery. Scenario based approach is utilized to provide a robust result. Given that constraints and variables increase dramatically, pre-processing techniques are utilized to reduce the model and obtain a solution for the large scale model within a reasonable time.