Efficiency in shortage reduction when using a more expensive common component

The paper considers the contribution of a common component in minimizing the expected units shortage subject to a budget constraint. A two-level product structure in an assemble-to-order system, where demands for two end products follow independent Erlang distributions, is assumed. We present closed form expressions for the objective function under various scenarios and provide efficient algorithms to compute the corresponding optimal inventory stock levels. It is found that, for all demand patterns considered, the relative reduction in the expected units shortage can be substantial when the inventory budget is large unless the cost of the common component is very high. When the budget is small, any potential benefit from employing commonality can be insignificant even if the premium for the common component is tiny.