In-stock service differentiation using nested protection

An emerging challenge to suppliers in business, military and emergency supply chains is to differentiate logistics service by customer value, or priority of demand. Order lead time and in-stock availability, both key indicators and cost drivers of such service, present viable avenues. Whereas lead time options are readily evaluated in terms of service and cost, this paper considers strategies and policies to differentiate in-stock availability. It is shown that nested protection, a key concept from Yield Management familiar in the airline and other industries, is a valuable technique to economise on scarce supplies, viz., maintain given service standards with less safety stock, and better utilise limited inventory to serve heterogeneous demand than standard methods do. Nested stock protection is too complex to resolve analytically or integrate in cost models optimising stock replenishment policies. A simulation primitive suffices, however, to plan and control effectively releases of high-cost and critical stocks to disparate sources of demand, when and while waiting for replenishment.