The costs and benefits of commonality in assemble-to-order systems with a (Q,r)-policy for component replenishment

In assemble-to-order systems, it has been shown that replacing a number of specific components by a smaller number of general-purpose, common components can reduce required safety stock levels due to the benefits of risk pooling. Previous research using single-period models has shown that even if the common components are somewhat more expensive than the unique components they replace, the benefits of risk pooling often outweigh the added purchasing costs. However, this has been shown often not to be the case with multiple-period models – in the long run, the added purchasing costs dominate the benefits of risk pooling. However, both single- and multiple-period models ignore one of the benefits of commonality – order pooling. With commonality, demand is pooled into a smaller number of components, reducing the required number of orders (or setups). After re-optimizing the order quantities and order intervals, both the ordering costs and cyclic carrying costs are reduced. This paper develops a model to consider the assemble-to-order environment where components are replenished according to a (Q,r)-policy. Results show that order pooling is a significant benefit; in many cases it is much more important than the risk-pooling benefit. In contrast to multiple-period models, there is often a total cost benefit with commonality, even when the common component is several percent more expensive than the unique components it replaces.