Supply Streams

Jing-Sheng Song () and Paul Zipkin ()
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Jing-Sheng Song: Fuqua School of Business, Duke University, Durham, North Carolina 27708
Paul Zipkin: Fuqua School of Business, Duke University, Durham, North Carolina 27708

Manufacturing & Service Operations Management, 2013, vol. 15, issue 3, 444-457

Abstract: A supply stream is a continuous version of a supply chain. It is like a series inventory system, but stock can be held at any point along a continuum, not just at discrete stages. We assume stationary parameters and aim to minimize the long-run average total cost. We show that a stationary continuous-stage echelon base-stock policy is optimal. That is, at each geographic point along the supply stream, there is a target echelon inventory level, and the optimal policy at all times is to order and dispatch material so as to move the echelon inventory position as close as possible to this target. We establish this result by showing that the solutions to certain discrete-stage systems converge monotonically to a limit, as the distances between the stages become small, and this limit solves the continuous-stage system. With demand approximated by a Brownian motion, we show that, in the continuous-stage limit, the supply stream model is equivalent to one describing first-passage times. This linkage leads to some interesting and useful results. Specifically, we obtain a partial differential equation that characterizes the optimal cost function, and we find a closed-form expression for the optimal echelon base-stock levels in a certain special case, the first in the inventory literature. These expressions demonstrate that the well-known square-root law for safety stock does not apply in this context.

Keywords: inventory/production; multiechelon; uncertainty; probability; diffusion; partial differential equations (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:15:y:2013:i:3:p:444-457

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