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

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  • Wang, Xun
  • Disney, Stephen M.

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.

Suggested Citation

  • Wang, Xun & Disney, Stephen M., 2017. "Mitigating variance amplification under stochastic lead-time: The proportional control approach," European Journal of Operational Research, Elsevier, vol. 256(1), pages 151-162.
    • Handle: RePEc:eee:ejores:v:256:y:2017:i:1:p:151-162
    DOI: 10.1016/j.ejor.2016.06.010
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    8. Songtao Zhang & Yanting Hou & Siqi Zhang & Min Zhang, 2017. "Fuzzy Control Model and Simulation for Nonlinear Supply Chain System with Lead Times," Complexity, Hindawi, vol. 2017, pages 1-11, September.
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    10. Michna, Zbigniew & Disney, Stephen M. & Nielsen, Peter, 2020. "The impact of stochastic lead times on the bullwhip effect under correlated demand and moving average forecasts," Omega, Elsevier, vol. 93(C).
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