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

Wang, Xun and Disney, Stephen M. 2017. Mitigating variance amplification under stochastic lead-time: the proportional control approach. European Journal of Operational Research 256 (1) , pp. 151-162. 10.1016/j.ejor.2016.06.010

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HD Industries. Land use. Labor
Uncontrolled Keywords: Inventory; Bullwhip effect; Stochastic lead-time; Demand correlation
Publisher: Elsevier
ISSN: 0377-2217
Date of First Compliant Deposit: 6 June 2016
Date of Acceptance: 6 June 2016
Last Modified: 20 Jan 2021 09:57

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