Modeling and centralization of strategic inventory for repairable and long lead-time spare parts

Abstract

This thesis develops an optimal inventory model for repairable and long leadtime spare parts for an Engine overhaul business. In addition, it presents a business case for centralization of inventory. Pratt & Whitney purchased the Norway Engine Center (NEC) in 2000. Two new engine centers, the Shanghai Engine Center (SEC) and the Turkey Engine Center (TEC) opened as joint ventures in 2009. While all three engine centers overhaul the same engine, they each make independent decisions regarding material strategy. Operations are expected to grow substantially at the two newest centers. Current inventory practices are not sustainable as operations expand. In addition, the overhaul business is a competitive market and there is growing pressure to decrease engine turn-around-time (TAT). An optimal material strategy is needed to reduce the material sourcing time and therefore reduce overall TAT. This project develops an inventory strategy that will significantly reduce TAT with minimal additional inventory investment. To accomplish this, an inventory model was developed to determine the optimal inventory level and then using this model, the business case for using centralization to reduce both holding cost and material sourcing time was investigated. All inventory in the engine centers were considered in this project, however rotable material became the focus of this research as it has the largest impact on the engine center through its high value and long lead-times. Rotable material is inventory used to buffer against the lead-time of parts out for repair. In the engine overhaul business material sourcing time is built into the process. This means that material is not needed immediately but rather after some specified amount of time. This feature is central to the rotable inventory model. The model determines the mean and variance of the excess lead-time - the portion of the lead-time that occurs after the specified time allotted. The excess lead-time is used to determine the optimal reorder point. Using this model, we show that centralization of rotable material will reduce inventory value by more than 30% over the current decentralized system both using the current TAT as well as the proposed TAT.