Dynamic inventory management with expediting

In modern global supply chains, goods travel stochastically from suppliers to their final destinations through several intermediate installations such as ports and distribution facilities. In such an environment, the supply chain must be agile to respond quickly to demand spikes. One way to achieve this objective is by expediting outstanding orders from the intermediate installations through premium delivery. In this research, we study the optimal expediting and regular ordering policies of a serial supply chain with a radio frequency identification deployment at each installation. Radio frequency identification technology allows capturing the state of the system, i.e., the time and location of goods, at any point in time, and thus enables to expedite outstanding orders directly to the destination, which faces stochastic demand. We identify systems, called sequential, that yield simple and tractable optimal policies. For sequential systems, outstanding orders including expediting do not cross in time. For such systems, we find that the optimal policies of expediting and regular ordering are the base stock type policies. The directional sensitivity of the base stock levels with respect to expediting costs is also obtained. We provide an important managerial insight on the radio frequency identification technology: we need to actively use the additional information from the radio frequency identification technology through new business processes such as expediting to unveil more benefits from the supply chain. On the other hand, orders may cross in time for systems that are not sequential, thus in such a case optimal policies are hard to obtain. We propose a heuristic for such systems and discuss its performance and limitation. Lastly, as an extension to the model, we study the optimal policies of expediting and regular ordering when there is an expiry date on outstanding orders. The optimal expediting policy identifies a number of base stock levels depending on the age of the orders, but the structure of the optimal policy remains simple for sequential systems. Thesis Supervisor: David Simchi-Levi Title: Professor, Department of Civil and Environmental Engineering and the Engineering Systems Division Thesis Supervisor: Sanjay Sarma Title: Professor, Department of Mechanical Engineering Acknowledgments First and foremost, I would like to thank my advisor Professor David Simchi-Levi for his valuable guidance throughout my PhD years. He is not only an excellent scholar with deep insights, but also a great advisor on both research and life. I indeed appreciate his wisdom at every key point of my research. I was very fortunate to become his student even though he is famous for being very selective in choosing his students and my home department is rather far from the field of supply chain management. It has truly been an honor and a pleasure to work with him. Next, I would like to thank my co-advisor Professor Diego Klabjan at Northwestern University. It is difficult to fully acknowledge here the extent of his support and express my gratitude. He is simply an amazing researcher, teacher, and mentor in every aspect of life. I can discuss anything with him, and he has been always there to help me and to encourage me. He was at MIT during 2005-2006 for his sabbatical year, and that is how I started working with him. Even after he left for Northwestern University, he remained as my co-advisor and guided me through every step of my research. Without him, I could not have completed my research. I would like to thank my thesis committee members, Professors Sanjay Sarma and Jeremie Gallien. Professor Sarma has been a good supporter of my research and always encourages me to keep going forward. Professor Gallien provided insightful comments and suggestions on this research. I appreciate all of their input and time. Also, I am very grateful to my Master's thesis advisor, Dr. Stanley Gershwin. He has always been a great advisor and mentor. I am greatly indebted to him for his help during my early days at MIT. I would like to thank all of my friends at MIT for making my life really enjoyable: Sunghwan Jung, Youngjae Jang, Hyuksang Kwon, Jaemyung Ahn, Sangwon Byun, and Sang-Il Lee, among others. I cannot name them all here since they are so many. I am equally grateful to every one of them, and my life would never have been the same without them. Finally, I am indebted to my family for their support. My parents and my sister are always supportive for my studies far away from home. My wife, Dooran Kim, gives me endless support, encouragement and love during ups and downs. This thesis could not have been finished without her support.