Controlling bullwhip and inventory variability with the golden smoothing rule

Stephen M. Disney, Ingrid Farasyn, Marc R. Lambrecht, Denis R. Towill and Wim Van De Velde

European Journal of Industrial Engineering, 2007, vol. 1, issue 3, 241-265

Abstract: A major cause of supply chain deficiencies is the bullwhip effect. Supply chain managers experience this variance amplification in both inventory levels and replenishment orders. In this paper, we analyse a major cause of the bullwhip effect, namely the classical Order-Up-To (OUT) policy and suggest a remedy (a smoothing replenishment rule). In general, dampening variability in orders may have a negative impact on customer service due to increase in inventory variance. We quantify the variance of the Net Stock (NS) levels and compute the required safety stock as a function of the smoothing required. The contribution of this paper is the analysis of the tradeoff between bullwhip and inventory variance resulting in a 'golden smoothing rule'. The golden smoothing rule refers to the fact that the values of two proportional feedback controllers are set equal to the Golden Ratio. [Received 5 September 2006; Revised 22 January 2007; Accepted 13 March 2007]

Keywords: bullwhip effect; supply chain management; SCM; inventory management; variance reduction; order-up-to policy; OUT policy; smoothing replenishment; safety stock; net stock variance; inventory variance; feedback control. (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (5)

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