High Level Inventory Network Modeling Approaches

Abstract

Over the last several decades, practitioners have used the Square Root of N (SQRTN) and the Portfolio Effect models to develop estimates of the change in finished goods inventory investment that will result from potential consolidations of existing supply chain networks. The relative simplicity of these two models has made them commonly used tools of consultants and practitioners. However, what is often overlooked or ignored in practice is that these models may or may not provide accurate projections, and that there are limitations to the range of problems which these models can address. In this paper, we evaluate the accuracy of projections made by the SQRTN and portfolio effect models under a variety of network conditions, and we provide guidance on when and how practitioners can both use and supplement these models. Our evaluations are based on the results of simulation studies which we conducted for this paper as well as many years of inventory management practice in private industry.