The Value of Component Commonality in a Dynamic Inventory System with Lead Times

Authors:
Jing-Sheng Song;Yao Zhao
Affiliations:
Fuqua School of Business, Duke University, Durham, North Carolina 27708, and Antai College of Economics and Management, Jiao Tong University, Shanghai, 200052 China;Department of Supply Chain Management and Marketing Sciences, Rutgers University, Newark, New Jersey 07102
Venue:
Manufacturing & Service Operations Management
Year:
2009

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Abstract

Component commonality has been widely recognized as a key factor in achieving product variety at low cost. Yet the theory on the value of component commonality is rather limited in the inventory literature. The existing results were built primarily on single-period models or periodic-review models with zero lead times. In this paper, we consider a continuous-review system with positive lead times. We find that although component commonality is in general beneficial, its value depends strongly on component costs, lead times, and dynamic allocation rules. Under certain conditions, several previous findings based on static models do not hold. In particular, component commonality does not always generate inventory benefits under certain commonly used allocation rules. We provide insight on when component commonality generates inventory benefits and when it may not. We further establish some asymptotic properties that connect component lead times and costs to the impact of component commonality. Through numerical studies, we demonstrate the value of commonality and its sensitivity to various system parameters in between the asymptotic limits. In addition, we show how to evaluate the system under a new allocation rule, a modified version of the standard first-in-first-out rule.