Extensions to the Guaranteed Service Model for Industrial Applications of Multi-Echelon Inventory Optimization

Abstract: Multi-echelon inventory optimization (MEIO) plays a key role in a supply chain seeking to achieve specified customer service levels with a minimum capital in inventory. In this work, we propose a generalized MEIO model based on the Guaranteed Service approach to allocate safety stock levels across the network at the lowest holding cost. This model integrates several existing and some novel features that are usually present in pharmaceutical multi-echelon supply chains into a single model: review periods, manufacturing facilities, hybrid nodes (nodes with both internal and external demand), minimum order quantities (MOQ), and different service level performance indicators (fill rate and cycle service levels). We include a polynomial regression to approximate fill rates as a possible target measure to set safety stocks. To improve efficiency, we propose a nonlinear programming model to support decision making, which can be reformulated as a Quadratically Constrained Program (QCP), which leads to order of magnitude reductions in computational time. The performance of the model is evaluated by solving illustrative and real-world cases, and is validated with simulation.