Service differentiation in spare parts supply through dedicated stocks

We investigate keeping dedicated stocks at customer sites in addition to stock kept at some central location as a tool for applying service differentiation in spare parts supply. We study the resulting two-echelon system in a multi-item setting, both under backordering and under emergency shipments assumptions (i.e. lost sales). In an extensive computational experiment, we show that dedicated stocks have significant added value: compared to an approach where all customers receive uniform service, we find average cost savings of 14% under backordering and 20% under emergency shipments. Furthermore, we find that dedicated stocks are comparable to critical level policies in terms of cost savings, while being much easier to implement in practice. Finally, we find further savings (20% under backordering, 23% under emergency shipments) by combining dedicated stocks and critical level policies in one aggregate differentiation strategy.