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Holding costs under push or pull conditions - the impact of the Anchor Point

Holding costs under push or pull conditions - the impact of the Anchor Point
Holding costs under push or pull conditions - the impact of the Anchor Point
Holding costs are traditionally determined from the investment in physical stock during a cycle. An alternative approach instead derives holding costs from Net Present Value (NPV) functions. It is known that applying both frameworks to the same system can lead to different holding cost valuations, but little explanation has been offered. By introducing the Anchor Point in a model, this paper shows, for four different systems, that traditional holding cost models (implicitly) assume pull conditions, while current NPV approaches model push conditions. This explains in part the differences between the methods. It is shown that the Anchor Point concept allows the construction of NPV models under pull conditions, giving results in better correspondence with traditional models. The traditional framework is restricted to pull conditions and important considerations could be easily overlooked, leading to wrong valuations of holding costs. NPV seems superior as such considerations are automatically incorporated. The application to multi-echelon inventory systems provides interesting insights on the roles of echelon stocks and lead-times, and offers potential for future research.
0377-2217
115-125
Beullens, Patrick
893ad2e2-0617-47d6-910b-3d5f81964a9c
Janssens, Gerrit K.
857c7829-2b42-457a-81f0-7bf8d72f5507
Beullens, Patrick
893ad2e2-0617-47d6-910b-3d5f81964a9c
Janssens, Gerrit K.
857c7829-2b42-457a-81f0-7bf8d72f5507

Beullens, Patrick and Janssens, Gerrit K. (2011) Holding costs under push or pull conditions - the impact of the Anchor Point. European Journal of Operational Research, 215 (1), 115-125. (doi:10.1016/j.ejor.2011.06.005).

Record type: Article

Abstract

Holding costs are traditionally determined from the investment in physical stock during a cycle. An alternative approach instead derives holding costs from Net Present Value (NPV) functions. It is known that applying both frameworks to the same system can lead to different holding cost valuations, but little explanation has been offered. By introducing the Anchor Point in a model, this paper shows, for four different systems, that traditional holding cost models (implicitly) assume pull conditions, while current NPV approaches model push conditions. This explains in part the differences between the methods. It is shown that the Anchor Point concept allows the construction of NPV models under pull conditions, giving results in better correspondence with traditional models. The traditional framework is restricted to pull conditions and important considerations could be easily overlooked, leading to wrong valuations of holding costs. NPV seems superior as such considerations are automatically incorporated. The application to multi-echelon inventory systems provides interesting insights on the roles of echelon stocks and lead-times, and offers potential for future research.

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More information

Published date: 2011
Organisations: Operational Research

Identifiers

Local EPrints ID: 205833
URI: http://eprints.soton.ac.uk/id/eprint/205833
ISSN: 0377-2217
PURE UUID: 373ad5ac-4c16-4818-abb6-58e19d0c0479
ORCID for Patrick Beullens: ORCID iD orcid.org/0000-0001-6156-3550

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Date deposited: 14 Dec 2011 09:38
Last modified: 15 Mar 2024 03:32

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Contributors

Author: Gerrit K. Janssens

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