Excess Inventories Redeployment Strategy
for Spare Parts Service Logistics Management
D. Mo1, D. C. K. Ho2, N. Chan3
Department of Supply Chain and Information Management, Hang Seng Management College, Hong Kong
(danielmo@hsmc.edu.hk1, dannyho@hsmc.edu.hk2, nicolechan@hsmc.edu.hk 3 )
Abstract – Many leading companies are now offering
global customers better spare parts services for system
maintenance through a more complex service logistics
network, extending beyond the traditional on-site stocking
management, to boost profit margin. One challenge these
spare parts service providers face is how to achieve desired
service levels at a low cost through minimization of excess
inventories in the global spare parts supply chain. To address
this issue, we demonstrate an inventory redeployment
strategy to transform a conventional spare parts supply chain
(with forward stocking facilities only) into a closed-loop,
multi-echelon service network with the capability of
redeploying inventories from overstocking to understocking
facilities, reducing purchase of high-value spare parts. To
assess the quality of our novel solution approach, we used a
network flow optimization model to analyze the proposed
excess inventories redeployment strategy of an international
company’s service parts operations, and found significant
inventory cost savings.
Keywords – Inventory management, service logistics
network design, network flow model, spare parts.
I. INTRODUCTION
Spare parts management is crucial to the maintenance
of critical systems in different sectors like healthcare,
military and aerospace. Instead of managing on-site spare
parts inventory, more customers have outsourced that
function to spare parts service providers. To stay
competitive and earn a profit, these service providers have
on one hand to offer highly responsive services to fulfil
next-day or even same-day delivery requirements, and on
the other to minimize operating costs. To address these
needs, we propose a new spare parts logistics model and
demonstrate its application in practice.
In this research, we study an international company
which manages 87 depots (which are forward stocking
facilities) to provide spare parts services for customers’
system maintenance in Asia-pacific region. Our
investigation shows that the company’s current operation
has suffered from excess inventories caused by non-
stationary demand, base-stock inventory policy and
forward logistics network structure. To solve the problem,
we propose an excess inventories redeployment strategy by
restructuring the forward logistics network into a closed-
loop network, aiming at better utilizing high-value
inventories and reducing purchase of new spare parts.
978-1-5386-0948-4/17/$31.00 ©2017 IEEE
Our research on how inventory redeployment strategy
can reduce excess inventories of spare parts in a service
logistics network contributes to the literature on two fronts:
(1) expand research focus of reverse logistics management
to spare parts inventory management, and (2) address the
need to deal with items with non-stationary demand in
spare parts inventory management research.
The organization of this paper is as follows. In Section
II, we review the literatures on spare parts inventory model
and logistics network design. In Section III, we discuss the
methodology of how excess inventories can be redeployed
through a network optimization model based on real data.
In Section IV, we present results with sensitivity analysis.
Finally, Section V presents the conclusion and future
research.
II. LITERATURE REVIEW
Review of spare parts inventory management literature
shows the need for more research on how to manage stock-
out or excess inventories of spare parts with non-stationary
demand in a service logistics network with multiple
stocking locations. Differed from before-sale supply chain
inventory management models, spare parts inventory
management are characterized by distinctive factors
including high spare parts cost, low demand with high
uncertainty, and the critical effect of missing parts. Past
studies of spare part inventory models examined on-site
age-based replacement, repairable and non-repairable
items, and regular and emergent orders [1]. As keeping
high-value spare parts for all systems on-site is cost
prohibitive, more users have outsourced spare parts
management and shifted the burden to service providers
who can provide the required parts on an emergency or
short lead time basis. This trend has driven research on how
service providers manage spare parts in multiple locations
of a service logistics network with forward stocking
facilities [2]-[5]. These studies proposed an inventory
pooling or sharing strategy with lateral supply to optimize
the holding cost, expedited shipment cost and stock-out
cost. With this strategy, when a local stocking point is out
of stock, demand would be satisfied by a nearby stocking
facility with an emergency shipment. As stationary demand
of forward inventory flows is generally assumed in these
models, there is a research gap on the management of
stock-out or excess inventories of spare parts with non-
stationary demand.
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Review of reverse logistics management literature
indicates a promising way to reduce excess spare parts
inventories. In this literature, some studies [6]-[9] applied
mixed integer programming models to solve reverse
logistics network design problems and determine the
optimal numbers and locations of remanufacturing
facilities, in both forward and reverse flows. Some recent
research [10]-[12] examined management of product
returns and determined optimal acquisition quantities of
used products with considerations of acquisition costs,
scrapping costs and remanufacturing costs in a closed-loop
supply chain network. Although these studies focused on
product returns and recycling, they inform us that spare
parts stocking facilities can handle both forward and more
importantly reverse flows of spare parts.
III. METHODOLOGY
To apply excess inventories redeployment strategy for
spare parts inventory and logistics management, we
propose to restructure a forward logistics network into a
closed-loop logistics network. Take a typical global
network with 3-tier forward stocking locations as an
example, the structure consists of a set of directed flows
from a centralized distribution center, to country depots,
and finally to city depots without reverse flow. See the
forward flows with solid lines in Fig. 1. This forward
logistics network is usually implemented in an inventory
planning system for spare parts management.
City Depot
Country Depot City Depot
Distribution Center City Depot
New Repair
Country Depot City Depot
Fig. 1. Closed-loop logistics network structure of spare parts
In such a forward logistics network structure, base-stock
(S-1, S) inventory policy is adopted in the inventory
planning system in each depot. When spare parts are
consumed due to user requests in a depot, an order of the
same request quantity would be replenished from the
preceding depot to meet the target inventory level of S. This
target inventory level varies and is calculated regularly to
fulfil dynamic demand. When the updated target level is
lower than the previous target level, an overstock situation
occurs. For the spare parts with high forecast usage, excess
inventories would be kept in the depot for future
consumption. However, for the parts with low forecast
usage, the excess inventories are regarded as wastes. It is
essential to identify which parts can be moved to other
depots with demand, and which parts to stay. If the excess
inventories can be redeployed to other depots in the
network, purchase of new spare parts can be reduced. See
the reverse flows with dotted lines in Fig. 1.
The quantity and locations of excess inventories
redeployment are determined based on considerations of
forecast usage at sourcing depot and destination depot,
target inventory level, on-hand and on-order inventory,
cost of a spare part, and transportation cost. We examine
this decision problem faced by a spare parts service
provider. With the real data provided by the company, we
develop excess inventories redeployment strategy by
optimization techniques.
As the target inventory level is named “approved
minimum” in the inventory planning system, the target
inventory level and approved min are used interchangeable
in the following discussion. We next discuss the data
collection, identification of excess inventories and the
optimization model for redeploying excess inventories.
A. DATA COLLECTION
In this research, we collected several reports from the
inventory planning system of the collaborated company.
The data sets include information of past usage, part cost,
on-hand, on-order, target inventory level of each service
part in each depot. Apart from inventory-related data, we
also established a transportation cost matrix which
indicates the express shipment cost among 87 depots. The
transportation cost data was collected from the UPS
Express website. The corporate freight rate with discount
was used, according to the company.
B. EXCESS INVENTORIES IDENTIFICATION
Excess inventory is defined based on a calculation of
User
on-hand inventories, on-order inventories, forecasted
User
monthly usage with a coefficient, target inventory level.
Excess inventory quantity is determined by the minimal
User value of two formulas listed below:
Excess inventory quantity based on target inventory level
User
= On-hand + On-order – Approved Minimum (1)
Excess inventory quantity based on forecast usage
= On-hand + On-order – Months of forecast usage (2)
The excess inventory quantity in Equation (1) is
identified by the target inventory level (Approved
Minimum) which is calculated by the inventory planning
system. Equation (2) is to calculate excess inventory
quantity based on months of forecast usage. The monthly
forecast usage is calculated first by averaging the past
three-month usage. It is then multiplied by a coefficient,
which is three-month usage, and decided by the spare parts
logistics planner to achieve shipment consolidation.
The quantity of excess inventories for redeployment is
the minimal value of Equation (1) and (2). If the minimal
value is not considered, it is possible to reallocate
unnecessary parts to the depot which is considered to have
excess inventories. As an illustration, for a depot, on-hand
quantity is 1, on-order quantity is 4, approved minimum is
5 and months of forecast usage is 3.495, excess quantity is
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equal to 1.505 by Equation (2). However, the depot has no Generic Reverse Network Flow Model (GRFLM)
excess inventory according to Equation (1), in which 1 + 4
– 5 = 0. If one part is redeployed to another depot, a 𝑚𝑎𝑥 ∑𝑛𝑖=1 ∑𝑛𝑗=1(𝑝𝑖 𝑥𝑖𝑗 − 𝑐𝑖𝑗 𝑥𝑖𝑗 ) (4)
replenishment order of one part will be automatically 𝑖≠𝑗
placed from the preceding depot to bring the inventory up
to the target inventory level. This causes unnecessary s.t.
additional transportation cost. ∑𝑛𝑗=1 𝑥𝑖𝑗 ≤ 𝑠𝑖 ∀𝑖 ∈ 𝑁 (5)
∑𝑛𝑖= 1 𝑥𝑖𝑗 ≤ 𝑢𝑗 ∀𝑗 ∈ 𝑁 (6)
𝑥𝑖𝑗 𝑎𝑟𝑒 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑔𝑒𝑟𝑠
C. REVERSE LOGISTCS NETWORK FLOW MODEL
In this section, we discuss the development of excess Constraint (5) ensures that all excess inventories are
inventory redeployment strategy by restructuring the shipped from the origin to destination depots. Constraint
forward logistics network into a closed-loop network. (6) guaranties that the redeployed inventories should not
Based on the existing forward logistics network structure, exceed the maximum level accepted by destination depots.
we establish a reverse logistics network connecting all During the investigation, it was found that the solution
depots, and formulate network flow for excess inventories erected barriers for execution in practice. The major issue
redeployment as a network flow optimization model. was too many shipment routes. See Fig. 2 for the results
To represent the reverse logistics network flow, we solved by the generic network flow model for one part.
consider a graph G = (N, A) with a finite set of nodes (N)
and a finite set of arcs (A). A depot is represented by a node. Origin Destination
Each depot would be the origin depot i=1,…,n with excess
GUR
inventories and also the destination depot j=1,…,n to 5 5
receive excess inventories. The shipment route between
two depots is represented by (𝑖, 𝑗) ∈ 𝐴. The objective of HYD
5
the reverse network flow model is used to maximize cost 5

saving by considering the dollar value of excess inventories 3 SSY

MAA
redeployed from depot i to depot j against the associated 3
19
shipment cost. The variables and parameters of our model 5
are shown below. NOI
5
1
Decision variables 2
SEL
DEL 16
𝑥𝑖𝑗 : shipment quantity of excess inventories from 3
origin depot i to destination depot j 7
𝑏𝑖𝑗 : binary decision variable to decide if the excess HCU
inventories in origin depot i would be shipped to 7 5 TKO
8
25
destination depot j MNL
13
2
Parameters 1 MEL
BLR 10
𝑠𝑖 : excess inventory quantity in origin depot i 3
𝑢𝑗 : maximum acceptable excess inventories to be
received in destination depot j
...
...

i j

𝑧𝑖𝑗 : allowable excess inventories shipped from origin

depot i to destination depot j
𝑐𝑖𝑗 : transportation cost of a spare part shipped from
origin i to destination j
𝑝𝑖 : spare part value in origin depot i
Before the model formulation, we need to define the
parameter (𝑢𝑗 ) of maximum excess inventories accepted in
destination depot j:
𝑢𝑗 = Months of forecast usage - On-hand - On-order
We now formulate the reverse logistics flow of excess
inventories as a generic linear network model for the
reallocation of excess inventory.
Fig. 2. Excess inventories redeployed in GRFLM
Fig. 2 shows that a destination depot can receive excess
inventories from more than one original depot and the
shipment quantity could be relatively small in some cases.
For instance, SSY absorbs 19 units of excess inventories
from five depots. As the capacity of receiving excess
inventories in SSY is reached, the remaining 2 units of
excess inventories in DEL would be shipped to SEL such
(3) that all excess inventories in DEL will be redeployed.
However, this is a less-than-ideal practical solution for the
company, which prefers few shipment routes and single
destination depot. A modified generic model with
additional constraints was thus developed to enhance its
practical value. The additional requirement is to ensure a

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maximum flow of excess inventories to a single destination with the second lowest shipping cost. MRFLM offers a
depot. The modified model is presented below: solution with much fewer shipment routes, as the number
of shipment paths are reduced from 18 in the GRFLM
Min-Path Reverse Network Flow Model (MRFLM) solution to 5 only (or about 72% reduction). For cost and
benefit comparison, GRFLM outperforms MRFLM in the
𝑚𝑎𝑥 ∑𝑛𝑖=1 ∑𝑛𝑗=1(𝑝𝑖 𝑏𝑖𝑗 𝑧𝑖𝑗 − 𝑐𝑖𝑗 𝑏𝑖𝑗 𝑧𝑖𝑗 ) (7) value of excess inventories redeployed ($21,000 vs.
𝑖≠𝑗 $11,400) but incurs higher transportation cost ($5,146 vs.
$2,465). In this case, GRFLM attained higher cost saving
s.t. ($15,854 vs. $8,935). This indicates MRFLM is superior in
∑𝑛𝑖= 1 𝑧𝑖𝑗 𝑏𝑖𝑗 ≤ 𝑢𝑗 ∀𝑗 ∈𝑁 (8) reducing shipment paths and transportation costs but may
∑𝑛𝑖= 1 𝑏𝑖𝑗 = 1 ∀𝑗 ∈𝑁 (9) have less potential in inventory reduction. We next
𝑧𝑖𝑗 = min(𝑠𝑖 , 𝑢𝑗 ) ∀𝑖 ∈ 𝑁 , ∀𝑗 ∈ 𝑁 (10) evaluate how monthly usage coefficient used in defining
𝑏𝑖𝑗 ∈ {0, 1} ∀𝑖 ∈ 𝑁 , ∀𝑗 ∈ 𝑁 (11) excess inventories affects excess inventory reduction and
transportation cost of the two models.
Equation (7) is the objective function to maximize the
cost savings of excess inventories minus transportation IV. RESULTS
cost by binary decision variable, bij Constraint (8) ensures
that the inventory quantity in destination depot should not To evaluate the monthly performance of two reverse
exceed its acceptable limit. Constraint (9) restricts the network flow models, we first identify the number of parts
shipping of excess inventories to one destination depot with excess inventory and its inventory amount
only. Constraint (10) is to determine the min-max value of respectively by Equation (1) and (2) in a month. Second,
excess inventory quantity moved from the origin depot to we analyze the number of shipment paths. Third, we
the destination depot. It ensures that the shipment quantity evaluate the cost savings of inventory reduction and
will not be less than excess inventory in origin depot or transportation costs. We also study the change of the
greater than the maximum acceptable excess inventories in coefficient of monthly usage from one to five to evaluate
destination depot. Constraint (11) refers to the binary the impacts of changing the parameters of 𝑠𝑖 and 𝑢𝑗 . Table
decision variable, bij = 1 if the excess inventories in depot 1 shows the results that the number of parts per depot with
i will be redeployed to depot j; otherwise, bij = 0. This excess inventory and total dollar value of excess inventory
model satisfies the business requirements and objectives. decrease when coefficient of monthly usage increases.
Fig. 3 shows the shipment paths of excess inventories after
TABLE 1. EXCESS INVENTORY QUANTITY AND VALUE
solving the above model for the same part (i.e. the one
Coefficient 1 2 3 4 5
examined in GRFLM). (# of months)
# of parts per 271 242 185 132 78
Origin Destination depot with
excess inv.
OSA
2 TKO Excess inventory 2,211 1,535.6 870.6 520.3 376.4
2 25 value ($K)

BKK 9 SSY
9 19
Based on these excess inventories, we first investigate
the number of shipment paths of the two models. Table 2
HCU 7 MEL shows the number of shipment paths which are solved by
10
7
two network flow models.
JKT 7 HKG
7 9 TABLE 2. NUMBER OF SHIPMENT PATHS
Coefficient 1 2 3 4 5
MNL 13 SEL (# of months)
13 16 GRFLM 21 54 150 130 101
MRFLM 18 40 86 90 77
i j
The number of shipment paths increases when the
Fig. 3. Reallocation of excess inventories in modified model coefficient of monthly usage increases, because a larger
coefficient allows more excess inventories to be received
Fig. 3 shows that each destination depot can only in the destination depot (uj). However, the number of
receive excess inventories from one origin depot due to shipment paths drops afterwards because the increase of
constraints (8)-(9) in MRFLM. Take MNL as an example, coefficient can also reduce excess inventories of the origin
although it is cheaper to ship MNL’s excess inventories to depot (si). Fig. 4 shows the cost and benefit comparison of
HKG than to SEL, HKG does not have enough capacity to GRFLM and MRFLM, and Table 3 shows the cost savings
absorb all excess inventories from MNL. Thus, all of value and percentage (against total excess inventory value).
MNL’s 13 units of excess inventories are shipped to SEL

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Inv. Redeployment (MRFLM) Transportation Cost (MRFLM)

total cost savings ranged from $138K to $181K.
Inv. Redeployment (GRFLM) Transportation Cost (GRFLM) For future research, we will further investigate the
250 interaction effects of 𝑢𝑗 and 𝑠𝑖 . Currently the coefficient of
200
monthly usage for 𝑠𝑖 is equal to that for 𝑢𝑗 . It is interesting
to investigate the effects of different coefficients for both
150 parameters. There could be many different cases, which
Thosand dollar

would affect the implementation of redeployment strategy.

100

50 ACKNOWLEDGMENT
We thank anonymous reviewers for their constructive
0 comments. This research is supported by the grant of RGC
1 2 3 4 5
FDS (UGC/FDS14/E05/16) and supported in part by the
Month
Fig. 4. Comparison of Two Reverse Network Flow Models
grant of RGC IIDS (UGC/IIDS14/E01/16).

TABLE 3. COST SAVINGS OF GRFLM AND MRFLM REFERENCES

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GRFLM: Cost 6,994 503,78
Saving ($)
GRFLM: Cost 0.3% 3.3%
Saving (%)
MRFLM: Cost 6,108 45,829
Saving ($)
MRFLM: Cost 0.3% 3.0%
Saving (%)
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inventories redeployed and transportation cost increase
with the coefficient of monthly usage until reaching three
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one shipment to the destination depot, whereas in GRFLM
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excess inventories decrease. Therefore, using three months
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V. CONCLUSION
In this paper, we examine the excess inventory
redeployment strategy for spare parts management. Many
inventory management systems face the challenges of
excess inventories caused by high demand uncertainty in
the forward logistics network structure. We propose to
restructure the forward logistics network into a closed-loop
network by redeploying excess inventories through reverse
logistics management. The performance of two reverse
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