Service level agreements: ready-rate analysis with lump-sum and linear penalty structures

Alamri, O, Abbasi, B, Minas, J and Zeephongsekul, P 2018, 'Service level agreements: ready-rate analysis with lump-sum and linear penalty structures', Journal of the Operational Research Society, vol. 69, no. 1, pp. 142-155.


Document type: Journal Article
Collection: Journal Articles

Title Service level agreements: ready-rate analysis with lump-sum and linear penalty structures
Author(s) Alamri, O
Abbasi, B
Minas, J
Zeephongsekul, P
Year 2018
Journal name Journal of the Operational Research Society
Volume number 69
Issue number 1
Start page 142
End page 155
Total pages 14
Publisher Palgrave Macmillan Ltd.
Abstract In operations management, service level agreements (SLAs) are widely used to evaluate and manage supplier performance. In a typical SLA, a target ready rate is periodically measured and a financial penalty is incurred if this target is not met. The ready rate considered in this study is defined as the long-run fraction of periods in which all customer demand is filled immediately from on-hand stock. Previous studies of SLAs have been solely concerned with one supplier serving one-customer, whereas in practice a supplier usually deals with more than one-customer. In multiple-customer cases, the supplier has an SLA with each customer and a penalty is incurred whenever the agreement is violated. In this work, we examine the impacts of various factors such as the base-stock level, the type of penalty and the review period duration on the supplier's cost function when the supplier deals with multiple-customers. The results show that dealing with more customers is preferable for a supplier (assuming the overall demand is the same) and that a longer performance review phase is beneficial under a lump-sum penalty contract.
Subject Logistics and Supply Chain Management
Operations Research
DOI - identifier 10.1057/s41274-017-0194-7
Copyright notice © Operational Research Society 2017
ISSN 0160-5682
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