Virtual pooling approximation using longest path network optimization
Author(s)Schell, Kevin E
Leaders for Global Operations Program.
Nikos Trichakis and Warren Seering.
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Abstract This thesis proposes a network swapping mechanism to approximate a virtual finished goods inventory pool under the constraint of fragmented commercial channel ownership. Globally, Caterpillar sells its product through a network of independently owned dealers which own their equipment inventory. These dealers are selling a product which has significant configuration complexity, a high coefficient of variation in demand, and long factory lead times - these three factors conspire to create a situation in which dealers must either maintain high levels of on-hand inventory or sacrifice customer service level. Virtual pooling can be a powerful technique for reducing held inventory and improving customer service level. In such a system, physical inventory is maintained in multiple locations, but a strong transshipment network allows inventory to be continuously rebalanced and effectively managed as a single pool. At Caterpillar, however, this is constrained by the fact that dealers are unwilling to unilaterally give up equipment that they own and which represents a potential sale, even if that equipment could be more effectively used by another dealer. This thesis proposes that a robust dealer swapping network that allows for multilateral swaps can generate universally beneficial inventory movement which lowers inventory and accelerates sales across the network. The mathematical formulation of this problem involves solving a longest path problem over a suitably defined network. In order to demonstrate the efficacy of this technique, a commercial network model was developed which allows for the simulation of multi-period equipment ordering, inventory management, and sales across a sample dealer network with and without network swapping implemented. Baseline simulation results conducted for a single vehicle class (Medium Wheel Loaders) suggest that network swapping has the potential to reduce on-hand inventory by more than 12% and decrease customer back orders by more than 17%. The swapping mechanism yields an NPV uplift of approximately USD 3 to 4M to the dealer network. This thesis concludes by proposing important extensions of the work conducted in this thesis to improve the practicality and financial impact of the proposed network swapping system.
Thesis: S.M., Massachusetts Institute of Technology, Department of Mechanical Engineering, in conjunction with the Leaders for Global Operations Program at MIT, 2018.Thesis: M.B.A., Massachusetts Institute of Technology, Sloan School of Management, in conjunction with the Leaders for Global Operations Program at MIT, 2018.Cataloged from PDF version of thesis.Includes bibliographical references (pages 94-95).
DepartmentMassachusetts Institute of Technology. Department of Mechanical Engineering.; Sloan School of Management.; Leaders for Global Operations Program.
Massachusetts Institute of Technology
Mechanical Engineering., Sloan School of Management., Leaders for Global Operations Program.