The role of contract expirations in service parts management

Official URL: http://dx.doi.org/10.1111/poms.12358

The majority of after-sales service providers manage their service parts inventory by focusing on the availability of service parts. This approach, combined with automatic replenishment systems, leads to reactive inventory control policies where base stock levels are adjusted only after a service contract expires. Consequently, service providers often face excess stock of critical service parts that are difficult to dispose due to their specificity. In this study, we address this problem by developing inventory control policies taking into account contract expirations. Our key idea is to reduce the base stock level of the one-for-one policy before obsolescence (a full or partial drop in demand rate) occurs and let demand take away excess stock. We refer to this policy as the single-adjustment policy. We benchmark the single-adjustment policy with the multiple-adjustment policy (allowing multiple base stock adjustments) formulated as a dynamic program and verify that for a wide range of instances the single-adjustment policy is an effective heuristic for the multiple-adjustment policy. We also compare the single-adjustment policy with the world-dependent base stock policy offered by Song and Zipkin (1993) and identify the parameter combinations where both policies yield similar costs. We consider two special cases of the single-adjustment policy where the base stock level is kept fixed or the base stock adjustment is postponed to the contract expiration time. We find that the initial demand rate, contract expiration time, and size of the drop in demand rate are the three key parameters driving the choice between the single-adjustment policy and its special cases.