Environmental and Economic Benefits of using Multi-Echelon Inventory Control

Abstract: Summary This master thesis evaluates the benefits of using multi-echelon control instead of single-echelon control of a multi-echelon inventory system. The multi-echelon inventory system studied in this thesis is a one-warehousemultiple- retailer inventory system. Multi-echelon inventory control is defined as a method to optimize the inventory system by taking the interdependencies between different stock locations in the system into consideration. Single-echelon control on the other hand is defined as optimizing each stock point in isolation and disregarding the interdependencies that exists. There has been extensive research in this area, and the fact that large potential cost reductions exist is well documented. However, little research has been performed to evaluate the environmental benefits that can be rendered by implementing multiechelon inventory control. The purpose of this master thesis is to evaluate the environmental and economic benefits of using a more advanced multi-echelon control method in a real case instead of the commercial single-echelon control method currently used. The hypothesis is that by fulfilling the fill-rates better, the amount of emergency orders can be reduced significantly, and by this also the total CO2-emissions can be reduced. The company studied is Lantmännen Maskin AB (LM) who provides their retailers in Sweden, Norway and Denmark with spare parts for agricultural machinery. The methodology used have been that of an operations research study where both mathematical models and simulations have been used. As a base model a commercial single-echelon model currently used at Lantmännen Maskin has been used, called SCP in this thesis. This model was compared to a more sophisticated multi-echelon model developed at Production Management, Lund University, Faculty of Engineering by Berling and Marklund (2012;2013), called MEM in this thesis. The approach of the project can be divided into five steps; first the data from the case company was gathered. Secondly, an existing simulation model was extended to fit the needs of this study. Thirdly, a stratified sampling was performed on the gathered data to find a representative sample of the case company’s items. Fourthly, the inventory system was optimized with SCP and MEM respectively. Finally, the results from the SCP-model and the MEM-model was simulated and compared. The results show that the average fill-rate was increased with 8.3% from 92.0% to 99.6%, the holding costs went down with 18.1% and the CO2- emissions were reduced with 57.0%. Further, the MEM model shows to be more consistent on achieving target fill-rate, whereas the SCP model varies a lot and delivers some fill-rates which are well below target and some that are above. Sensitivity analysis of the results concerning the CO2-emissions shows that for this case study the emergency orders sent by air do not affect the system very much. The reason is that the emergency transports by air are very few compared to the ones sent by truck. To really examine the benefits that could be achieved with the MEM model compared to the SCP model, a modified case set up was investigated where all emergency orders were assumed to be sent by air. In this case the reduction of CO2-emissions can be as high as 90%. Another important aspect found during this thesis concerning the CO2-emissions is that certain item attributes can make some items affect the CO2-emissions of the whole system in a non-proportional way. Two important factors were found, weight and mean demand. All CO2-emissions are linearly dependent on the weight, and consequently, this is a very important factor. But the second factor has even more influence. The reason for this is that if the mean demand for an item is high compared to other items then this item can have relatively many emergency orders even if the fill-rate is high. This was found during the study where one item, which had a high fill-rate, emitted CO2-emissions equivalent to 68% of the CO2-emissions of all of the studied items. Consequently, the conclusion from the results is that implementing the MEM model instead of the SCP model will reduce the environmental impact. Further, there are other aspects which are important to consider; firstly the MEM model will be more consistent on achieving target fillrates than the SCP model, secondly the reduction of CO2-will be greater in a system using air transport for emergency orders instead of land transport, and finally, the weight and mean demand are important aspects to consider if the environmental impact is to be reduced.