Supply Chain Design and Inventory Management Optimization in the Motors Industry

Abstract

This article studies the supply chain redesign under demand uncertainty over a multi-period planning. We propose an optimization model to solve the problem taking into account strategic and tactical plans. This model is applied to the electric motors industry but it can be easily extended to other supply chains. Long term decisions involve new installations, expansions and elimination of warehouses. Tactical decisions include deciding inventory levels (safety stock and expected inventory) for each type of product in distribution centers and customer plants, as well as the connection links between the supply chain nodes. Capacity constraints are also considered when planning inventory levels. At the tactical level it is analyzed how demand of failing motors is satisfied, and whether to use new or used motors. The uncertain demand is addressed by defining the optimal amount of safety stock that guarantees certain service level at a customer plant. In addition, the risk-pooling effect is taken into account when defining inventory levels in distribution centers and customer zones. Due to the nonlinear nature of the original formulation, a piecewise linearization approach is applied to obtain a tight lower bound of the optimal solution.