Inventory-service optimization in configure-to-order systems

This study is motivated by a process-reengineering problem in personal computer (PC) manufacturing, i.e., to move from a build-to-stock operation that is centered around end-product inventory towards a configure-to-order (CTO) operation that eliminates end-product inventory. In fact, CTO has made irrelevant the notion of preconfigured machine types and focuses instead on maintaining the right amount of inventory at the components. CTO appears to be the ideal operational model that provides both mass customization and a quick response time to order fulfillment. To quantify the inventory-service trade-off in the CTO environment, we develop a nonlinear optimization model with multiple constraints, reflecting the service levels offered to different market segments. To solve the optimization problem, we develop an exact algorithm for the important case of demand in each market segment having (at least) one unique component, and a greedy heuristic for the general (nonunique component) case. Furthermore, we show how to use sensitivity analysis, along with simulation, to fine-tune the solutions. The performance of the model and the solution approach is examined by extensive numerical studies on realistic problem data. We present the major findings in applying our model to study the inventory-service impacts in the reengineering of a PC manufacturing process.