Tools to improve performance: inventory reservation and nested allocation

Companies often wish to provide different levels of service to different classes of customers. Customer differentiated service levels may be motivated by differences in the perceived customer lifetime value or by specific contractual agreements that include service level guarantees. One way to provide differentiated service levels is to reserve a certain portion of the available inventory exclusively for certain classes of customers

For example, while waiting for a planned stock replenishment, a major electronics manufacturer rations its limited stock of ADSL kits among several different telecom clients to ensure that the contractually agreed service levels for this high-priority class of customers can be satisfied.

Current approaches to inventory reservation are typically based on cost and revenue measures. An organisation assumes that it can assign specific revenue or penalty cost to a customer for any order or unit of demand fulfilled or unfulfilled. In practice, however, it is very difficult to accurately estimate the (especially the long-term) financial implications of not meeting customer demand and corresponding service level requirements on an individual order basis.

For instance, in the case of a pandemic disease, it is obvious that critical personnel who are needed in healthcare institutions to assist those who are sick should be given priority in obtaining the medications. On the other hand, the general population should also have sufficient access to the medications, and so some amount of the drugs should be made available to them, even if on a first-come-first-served basis. Consequently, public health officials have to develop protocols for rationing the available medications based on multiple, non-financial competing objectives.

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