Trade-off Between Working Capital and Service Levels : A Model-Based Case Study

Sammanfattning

In this thesis, we analyze the trade-off between working capital and service levels, using JOST Umeå AB’s European supply chain and the distribution center in Biebesheim as a case study. The study focuses on how service level requirements influence working capital tied up in inventory and pipeline inventory. To analyze this relationship, we developed a mixed-integer linear programming (MILP) model to represent inventory dynamics, replenishment decisions, and material flows over a one-year planning horizon. Although the supply chain has a multi-echelon structure, the model applies a single-echelon perspective. Inventory decisions are made at the distribution center, while upstream stages are represented through lead times and pipeline inventory. The results show that working capital is mainly driven by safety stock and lead times. Increasing the service level leads to higher working capital, with a nonlinear increase at higher service levels. The trade-off analysis indicates that a balanced service level is found around 97–98%, where further service improvements become increasingly costly. The results also show that current safety stock levels are not fully optimized across products. The thesis concludes that the studied company could benefit from a more structured safety stock framework based on selected service levels and product-level demand characteristics. Together with their current operational knowledge, this could improve the balance between service level and working capital.