Using commonality as backup safety stock

Abstract It is well known that replacing several parts by a single common part can reduce required safety stock levels due to the benefits of risk pooling. It is not clear, however, if this reduces cost when the common part is more expensive than the parts it would replace. Recent analysis has shown that even when the common part is more expensive, it is often still worthwhile to employ in the single-period case. However, this is usually not true in the multiple-period case. This paper will consider the possibility of using both cheaper unique parts and a more expensive common part. Initial demand is met with the unique parts. The common part is used only as backup, when one or more of the unique parts stocks out. A multiple-period (or infinite-horizon) model is developed that considers purchasing, holding, and shortage costs. Results will show that the strategy of using commonality as backup (CAB) dominates the strategies of no commonality (NC) or pure commonality (PC), and may still be worthwhile even if the common part is significantly more expensive than the unique parts.

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