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Demand evolution in stochastic inventory systems: Riskiness increase

  • Li, Xiaoming
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    This paper characterizes demand evolution in the steady state under common inventory policies in a single-location stochastic inventory system. Our results show that downstream demand nonstrictly second-degree stochastically dominates upstream orders and the bullwhip effect occurs. We provide the link between demand evolution and utility theory for stochastic inventory systems. Our model is general in that ultimate customer demand follows an arbitrary stationary distribution and the facility may arbitrarily select policy parameters.

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    File URL: http://www.sciencedirect.com/science/article/B6VF8-4TKX0GX-2/2/a5802e359a38e62686ff4ad10e2c4368
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    Article provided by Elsevier in its journal International Journal of Production Economics.

    Volume (Year): 116 (2008)
    Issue (Month): 2 (December)
    Pages: 182-189

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    Handle: RePEc:eee:proeco:v:116:y:2008:i:2:p:182-189
    Contact details of provider: Web page: http://www.elsevier.com/locate/ijpe

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    1. Towill, Denis R. & Zhou, Li & Disney, Stephen M., 2007. "Reducing the bullwhip effect: Looking through the appropriate lens," International Journal of Production Economics, Elsevier, vol. 108(1-2), pages 444-453, July.
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    7. Frank Chen & Zvi Drezner & Jennifer K. Ryan & David Simchi-Levi, 2000. "Quantifying the Bullwhip Effect in a Simple Supply Chain: The Impact of Forecasting, Lead Times, and Information," Management Science, INFORMS, vol. 46(3), pages 436-443, March.
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    15. Dejonckheere, J. & Disney, S. M. & Lambrecht, M. R. & Towill, D. R., 2003. "Measuring and avoiding the bullwhip effect: A control theoretic approach," European Journal of Operational Research, Elsevier, vol. 147(3), pages 567-590, June.
    16. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, June.
    17. Kelle, Peter & Milne, Alistair, 1999. "The effect of (s, S) ordering policy on the supply chain," International Journal of Production Economics, Elsevier, vol. 59(1-3), pages 113-122, March.
    18. Li, Xiaoming & Sridharan, V., 2008. "Characterizing order processes of using (R,nQ) inventory policies in supply chains," Omega, Elsevier, vol. 36(6), pages 1096-1104, December.
    19. Porter, R. Burr, 1973. "An Empirical Comparison of Stochastic Dominance and Mean-Variance Portfolio Choice Criteria," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(04), pages 587-608, September.
    20. Wright, David & Yuan, Xin, 2008. "Mitigating the bullwhip effect by ordering policies and forecasting methods," International Journal of Production Economics, Elsevier, vol. 113(2), pages 587-597, June.
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    22. Hoberg, Kai & Bradley, James R. & Thonemann, Ulrich W., 2007. "Analyzing the effect of the inventory policy on order and inventory variability with linear control theory," European Journal of Operational Research, Elsevier, vol. 176(3), pages 1620-1642, February.
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