Jihong Ou

Impact on inventory costs with consolidation of distribution centers

Abstract The consolidation of Distribution Centers (DCs) is a new trend in global logistics management, with a reduction in inventory costs often being cited as one of the main benefits. This paper uses an analytical modeling approach to study the impact on facility investment and inventory costs when several DCs are consolidated into a central DC. In particular, our model suggests that consolidation leads to lower total facility investment and inventory costs if the demands are identically and independently distributed, or when they follow independent but possibly nonidentical Poisson processes. This agrees with the conclusion of the classical EOQ and newsvendor models. However, we show by an example that, for general stochastic demand processes, the total facility investment and inventory costs of a consolidated system can be infinitely worse off than that of a decentralized system. This arises mainly because the order replenishment fixed cost yields a cost component proportional to the square root of the mean value of the demand, while the demand uncertainty yields a cost component proportional to the standard deviation of the demand. Whether consolidation is cost effective or not depends on the trade-off between these two components, as indicated by an extensive numerical study. We also propose an algorithm that solves for a distribution system with the total facility investment and inventory costs within √2 of the optimal.

Stability of Data Networks: Stationary and Bursty Models

This paper studies stability of network models that capture macroscopic features of data communication networks, including the Internet. The network model consists of a set of links and a set of possible routes that are fixed subsets of links. A connection is dynamically established along one of the routes to transmit data as requested and is terminated after the transmission is over. The transmission bandwidth of a link is dynamically allocated, according to specific bandwidth allocation policy, to ongoing connections that traverse the link. A network model is said to be stable under a given bandwidth allocation policy if, roughly, the number of ongoing connections in the network will not blow up over time. We consider a stationary and a bursty network model; the former assumes stochastically stationary arrival processes of connections as did many theoretical studies, while the latter allows more realistic bursty and correlated arrival processes. For both models under a necessary stability condition (i.e., the average offered transmission load on each link is within its bandwidth capacity), we show that the proportionally fair, the minimum potential delay, the max-min fair, and a class of utility-maximizing bandwidth allocation policies ensure network model stability, while some priority-oriented and maximum throughput policies do not. Interestingly, the bandwidth allocation policy that maximizes the arctan(·) utility ensures the stability of the stationary model butnot the bursty model. This raises a serious concern about the current practice in the Internet protocol design, since such a policy is thought of as a good approximation of one of the most widely used TCP in the Internet.

Coordination of stocking decisions in an assemble-to-order environment

This paper examines an assemble-to-order environment involving a short-life-cycle product that is sold in two different configurations, each requiring a unique component that must be stocked in advance. Both configurations of the product are assembled on the same equipment which has limited capacity. The focus of the analysis is on the determination of the appropriate stocking quantities for each of the configuration specific components. Because the same assembly capacity is often reused for different instances of the component stocking problem, we treat assembly capacity as exogenous. This represents the fact that capacity decisions are often made less frequently than are procurement/production quantity decisions. We first solve for the first-best stocking policy when the components are produced internally. We then consider the case when the components are procured from external suppliers, and investigate how different forms of contract between the assembler and the component suppliers affect coordination of the supply chain as well as each partys profit. One particularly interesting finding is that it is possible to coordinate the supply chain with a single-price contract between each supplier and the assembler while awarding all parties positive profit.

Service Performance Analysis and Improvement for a Ticket Queue with Balking Customers

Queueing systems managed by ticket technology are widely used in service industries as well as government offices. Upon arriving at a ticket queue, each customer is issued a numbered ticket. The number currently being served is displayed. An arriving customer balks if the difference between his ticket number and the displayed number exceeds his patience level. We propose a Markov chain model of a ticket queue and develop effective evaluation tools. These tools can help management quantify the service level and identify the performance gap between the ticket queue and the conventional physical queue, in which a waiting line is formed. We gain insights about the ways customer service is affected by information loss in the ticket queue. In particular, we show that ticket and physical queues have significantly different balking probabilities when customer patience is low and the system traffic is heavy. We also propose an improvement to the ticket queue that provides each customer with his expected waiting time conditioned on his observed number difference, which is shown to raise the performance of the ticket queue to that of the physical queue.

Joint management of finished goods inventory and demand process for a make-to-stock product: a computational approach

In this paper, we consider the joint management of finished goods inventory and demand for a product in a make-to-stock production system. The production process is random with controllable mean rate, and the demand process is stochastic with changeable mean rate dependent on the sale price being high or low. The management issue is how to dynamically adjust the production rate and the sale price to maximize the long run total discounted profit. We show that: 1) the optimal management of the finished goods inventory follows a base stock policy: when the inventory is above certain base stock level, the production is halted; otherwise the maximum production rate is deployed to raise the inventory to the base stock level; and 2) the optimal management of the demand process follows a price switch threshold policy: when the inventory is above the threshold, the low sale price is chosen to sell the product; and below it the high price is chosen to reduce the demand. We provide an algorithm to compute the base stock level and price switch threshold. Extension to multiple price choices is given with proofs highlighted.

Inventory Cost Effect of Consolidating Several One-Warehouse Multiretailer Systems

Consolidation of warehouses is a new trend in global logistics management, and the reduction in order processing and inventory costs is often cited as one of the main motivations. In this note we show that when retailers face constant demand rates and their ordering costs are independent of the warehouse that services them, consolidated systems arerarely suboptimal andalways lead to close-to-optimal inventory replenishment costs. In particular, we prove that using two (one) properly selected warehouses, the systemwide inventory replenishment cost is in the worst case at most 2% (14.75%) more than the optimal.

Optimal control of price and production in an assemble-to-order system

We study the optimal control of an assembly system that produces one assembled-to-order final product with multiple made-to-stock components and sells it at variable price. It is shown that a threshold control on component production, product price, and product orders maximizes total discounted profit over an infinite horizon.

Management of inventory replenishment and available offerings for goods sold with optional value-added packages

Abstract In the highly competitive retail industry many retailers bundle goods with optional value-added packages to enhance the attraction of the goods and increase their revenue. Offering such packages affects the sales and hence the inventory management of the goods. To maximize the benefits of bundling, the package offerings should vary with the inventory level of the goods. In this paper we propose a model to analyze the joint optimal management of a single good and its associated package offering and inventory control for the good. We define a procedure to construct superior offerings, which are shown to contain the optimal package offerings for all inventory levels of the goods. After obtaining the structural properties of the superior offerings and applying an existing result on the optimal inventory control, we deduce that the optimal inventory management policy is of the reorder-point, order-up-to-level, or (s, S), type, and the optimal choice of the package offering at any given inventory level of the goods is one of the superior offerings. Numerical examples show that the joint optimization model can substantially improve profitability over the policy of offering the same packages all of the time.

An Optimization Based Approach to the Train Operator Scheduling Problem at Singapore MRT

Singapore Mass Rapid Transit (SMRT) operates two train lines with 83 kilometers of track and 48 stations. A total of 77 trains are in operation during peak hours and 41 during off-peak hours. In this article we report on an optimization based approach to develop a computerized train-operator scheduling system that has been implemented at SMRT. The approach involves a bipartite matching algorithm for the generation of night duties and a tabu search algorithm for the generation of day duties. The system automates the train-operator scheduling process at SMRT and produces favorable schedules in comparison with the manual process. It is also able to handle the multiple objectives inherent in the crew scheduling system. While trying to minimize the system wide crew-related costs, the system is also able to address concern with respect to the number of split duties.

A differentiated service scheme to optimize website revenues

We consider a website host server with web quality of service (QoS) capabilities to offer differentiated services. A quantitative modelling framework is set up to analyse the economic benefits of differentiated services and to build optimization models for managing the website hosts connection bandwidth to the Internet (which is assumed to be the bottleneck factor determining the QoS). Three models are formulated corresponding to three operational scenarios to provide differentiated services. The first is for the marketing manager to classify visit requests as premium or basic when the information technology (IT) manager has already reserved bandwidths for the two classes, and the second is for the IT manager to allocate the total available bandwidth to each class when the marketing manager has already designated which visit requests are premium and which are basic. The third is for the joint optimization of request classification and bandwidth allocation when centralized coordination is possible. Analytic results are obtained for a special case that corresponds to very impatient customers requesting large amounts of data. Qualitative insights gained and numerical results obtained strongly support the implementation of differentiated services. More interestingly, the decentralized models that use simple and rough-cut rules yield solutions almost as good as the joint optimization model.