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An Empirical Study of Service Differentiation for Weapon System Service Parts

Krannert School of Management, Purdue University, West Lafayette, Indiana 47907
Department of Operations and Information Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6366
Operations and Management Science Department, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455
vinayak{at}purdue.edu
cohen{at}wharton.upenn.edu
kdonohue{at}csom.umn.edu

The question of how to effectively manage items with heterogeneous attributes and differing service requirements has become increasingly important to supply chains that support the delivery of after-sales service. However, there has been little investigation to date on how organizations actually manage inventory levels under such circumstances. This study provides such an investigation, focusing on the logistic system used to manage consumable service parts for weapon systems in the U.S. military. Our findings, based on interviews and rigorous analysis of part attribute and performance data, suggest that in practice a part's service level is negatively affected by an item's cost and is less affected by attributes such as its priority code. We introduce a simple inventory model to explain our empirical findings and explore how variations in item attributes can interact with an inventory policy to affect system performance. Based on this model, we recommend using explicit service-level targets for priority categories to achieve performance consistent with part priority. We show, using military data, that a service differentiation strategy can be an effective way of allocating inventory investment by providing higher service for critical parts at the expense of accepting lower service levels for parts with less importance.

Subject classifications: Military, cost effectiveness: service differentiation; Inventory, applications: service parts for weapon systems.
History: Received September 2000; revision received March 2002; accepted August 2002.