Mitigating variance amplification under stochastic lead-time: The proportional control approach

Xun Wang and Stephen M. Disney

European Journal of Operational Research, 2017, vol. 256, issue 1, 151-162

Abstract: Logistic volatility is a significant contributor to supply chain inefficiency. In this paper we investigate the amplification of order and inventory fluctuations in a state-space supply chain model with stochastic lead-time, general auto-correlated demand and a proportional order-up-to replenishment policy. We identify the exact distribution functions of the orders and the inventory levels. We give conditions for the ability of proportional control mechanism to simultaneously reduce inventory and order variances. For AR(2) and ARMA(1,1) demand, we show that both variances can be lowered together under the proportional order-up-to policy. Simulation with real demand and lead-time data also confirms a cost benefit exists.

Keywords: Inventory; Bullwhip effect; Stochastic lead-time; Demand correlation (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:256:y:2017:i:1:p:151-162

DOI: 10.1016/j.ejor.2016.06.010

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