Stochastic Optimization of Inventory at Large-scale Supply Chains

TL;DR

This paper introduces a stochastic optimization framework for inventory management in large-scale supply chains, effectively reducing inventory levels and costs while maintaining service levels amidst uncertainties.

Contribution

It reformulates inventory management as a constrained stochastic optimization problem and develops a simulation-optimization framework for optimal reorder parameters.

Findings

Reduced inventory levels by 10-35%

Achieved hundreds of millions of dollars in savings

Successfully applied at global enterprise scale

Abstract

Today's global supply chains face growing challenges due to rapidly changing market conditions, increased network complexity and inter-dependency, and dynamic uncertainties in supply, demand, and other factors. To combat these challenges, organizations employ Material Requirements Planning (MRP) software solutions to set inventory stock buffers - for raw materials, work-in-process goods, and finished products - to help them meet customer service levels. However, holding excess inventory further complicates operations and can lock up millions of dollars of capital that could be otherwise deployed. Furthermore, most commercially available MRP solutions fall short in considering uncertainties and do not result in optimal solutions for modern enterprises. At C3 AI, we fundamentally reformulate the inventory management problem as a constrained stochastic optimization. We then propose a simulation-optimization framework that minimizes inventory and related costs while maintaining desired service levels. The framework's goal is to find the optimal reorder parameters that minimize costs subject to a pre-defined service-level constraint and all other real-world operational constraints. These optimal reorder parameters can be fed back into an MRP system to drive optimal order placement, or used to place optimal orders directly. This approach has proven successful in reducing inventory levels by 10-35 percent, resulting in hundreds of millions of dollars of economic benefit for major enterprises at a global scale.