INCAP – Applying short-term flexibility to control inventories

Abstract

Abstract Inventory Based Capacity Control (INCAP) is a very simple method that allows inventory levels to be effectively controlled by using short-term capacity flexibility in make-to-stock settings. Moreover, INCAP can be used for finished goods inventories as well as for semi-finished goods inventories. The basic idea is to define upper and lower inventory limits and to adjust capacities if the inventory level reaches either limit. Should the inventory fall below the lower limit, capacity is increased to prevent stock-outs. Similarly, in order to avoid excess inventories the capacity is decreased should the inventory rise above the upper limit. INCAP is thus able to control inventory levels within a defined inventory range. In order to do so, it applies short term measures like over-time or extra shifts to increase capacities and cancels work hours or shifts to decrease capacities. Simulation experiments based on data from the automotive industry show that INCAP is able to improve the performance of a manufacturing system in that it significantly reduces the inventory levels necessary for guaranteeing a satisfactory service level. Overall, INCAP is found to be a straightforward but powerful method, able to cope both with uncertainties in production output as well as with varying demand. However, some restrictions do apply: INCAP depends not only on a minimum level of short-term capacity flexibility, but also in the standard set-up presented here it is limited to make-to-stock environments with similar products.