An analysis on the benefits of information sharing in multi-echelon inventory control models

Abstract: With growing markets and customers being geographically spread out, more pressure is put on a company’s logistics processes and their inventory structures are becoming more complex. This puts more pressure on the inventory control solution provided by a company like IFS, that supports their customers with inventory control through the Inventory Planning and Replenishment module in IFS Applications. As their customers’ supply chains grow larger, their inventory structures become more complex the next step is to find a solution for the IPR module more suitable in a called multi-echelon structure, i.e. several tiers of stock locations, such as local, regional and central warehouses.   The purpose of this study is to compare a reorder point model with a solution suitable in a multi-echelon setting and investigate how they are able to manage uncertainties with service level targets.   A literature study was performed, to find previous research on inventory control in multi-echelon inventory systems. In the literature study, the importance of coordination and information sharing between the echelons was emphasized and used as a focus when finding a suitable multi-echelon model. To answer the purpose a theoretical model was formulated from the findings in previous research, with a replenishment method suitable in a multi-echelon environment. The inventory control models also included lot sizing method and a safety mechanism, where the difference between the models were their respective replenishment policy. The theoretical model was based on the replenishment method Distribution Requirements Planning (DRP), as it enables information sharing, coordination and synchronization of the supply chain, while the other inventory control model uses the Reorder Point method (ROP).   As information sharing was emphasized in previous research on multi-echelon systems, and the main difference between the two inventory control models is the information sharing in the DRP model, the important question to be answered with the comparison is; what effects and benefits can be achieved through information sharing in a multi-echelon inventory system? The two inventory control models were then simulated in Excel and exposed to even demand and seasonal variations in an inventory structure with three echelons and four sites, see figure below. When analyzing the results three evaluation criteria were used; difference in service levels, average inventory levels and if there were signs of overstocking in the regional and central warehouse, i.e. if the system was exposed to the bullwhip effect.   The analysis was carried out based on the criteria above and divided into three sections. First, differences between the models for even demand were investigated. The same procedure followed for seasonal demand, identifying differences and what caused them. Findings were then summed up at the end of the chapter. For even demand, differences were small and sharing information does not give large benefits. Under seasonal demand though, sharing information proved to be very beneficial, reducing average inventory held in the system by 60%, compared to not sharing information. This because sharing information together with synchronizing eliminates the bullwhip effect.   By testing different standard deviations, changing lead times and order quantities, using forecast or being blind to forecast, the robustness of the conclusions drawn from the analysis was put to the test. Carrying out a sensitivity analysis on the models served two purposes. First, finding more evidence promoting the benefits of synchronizing the supply chain and how important it is that the shared information is correct, otherwise the benefits are reduced. The second purpose was to validate that the models performed as expected when changing input data.   The conclusions were the following:   Information sharing enables synchronization of the supply chain Synchronization allows for reaching higher service levels with lower inventory levels   Findings suggest that by sharing information, which must be the first step, synchronizing the inventory system is possible. It is the synchronization that creates the real benefits, such as higher service levels and lower inventory levels. However, the quality and accuracy of the shared information was found to play an important role. Sharing inaccurate or wrong information increase the risk of the system starting to suffer from the bullwhip effect, resulting in higher inventory levels and lower service levels.