Coordinating Lead-Time and Safety Stock Decisions in a Two-Echelon Supply Chain with Autocorrelated Consumer Demand

Katholieke Universiteit Department of Decision Sciences and Information Management Working Paper No. 1009

31 Pages Posted: 5 Jun 2010

See all articles by Robert N. Boute

Robert N. Boute

Vlerick Leuven Gent Management School

Stephen M. Disney

Cardiff University - Cardiff Business School

Marc Lambrecht

KU Leuven, Research Center for Operations Management, Faculty of Economics and Business

Benny Van Houdt

University of Antwerp

Date Written: June 1, 2010

Abstract

In this paper we study a two-echelon supply chain with a retailer serving a consumer who is sensitive to marketing and pricing promotions. This results in either positively or negatively autocorrelated demand. Based on the observed consumer demand, the retailer replenishes with an adaptive order-up-to inventory policy satisfying a pre-specified fill rate. We assume the manufacturer produces the retailer’s orders on a make-to-order basis and he decides on the lead time based on the retailer’s order pattern. We analyze the interaction between the consumer demand process, the retailer’s replenishment decision (and corresponding safety stock decision), and the manufacturer’s production lead time. We encounter a lead time/safety stock dependency problem – the retailer’s replenishment decision depends on the expected manufacturer’s lead time, whereas the actual manufacturing lead time depends on the replenishment decision (order size) – and develop an exact iterative procedure to solve this interaction effect. Surprisingly, given equal variability, a negatively autocorrelated, period-to-period oscillatory consumer demand provides shorter lead times and lower safety stocks as opposed to a positively autocorrelated, meandering consumer demand.

Keywords: Production/Inventory System, Supply Chain Coordination, Lead-Time/Safety Stock Interaction, Operations/Marketing Interface

Suggested Citation

Boute, Robert N. and Disney, Stephen M. and Lambrecht, Marc and Van Houdt, Benny, Coordinating Lead-Time and Safety Stock Decisions in a Two-Echelon Supply Chain with Autocorrelated Consumer Demand (June 1, 2010). Katholieke Universiteit Department of Decision Sciences and Information Management Working Paper No. 1009. Available at SSRN: https://ssrn.com/abstract=1620237 or http://dx.doi.org/10.2139/ssrn.1620237

Robert N. Boute (Contact Author)

Vlerick Leuven Gent Management School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

Stephen M. Disney

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Marc Lambrecht

KU Leuven, Research Center for Operations Management, Faculty of Economics and Business ( email )

Leuven, B-3000
Belgium

Benny Van Houdt

University of Antwerp ( email )

Prinsstraat 13
Antwerp, Antwerp 2000
Belgium

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