A Smoothing Replenishment Policy with Endogenous Lead Times

27 Pages Posted: 4 Oct 2005

See all articles by Robert Boute

Robert Boute

Catholic University of Leuven (KUL) - Department of Applied Economics

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: January 26, 2006

Abstract

We consider a two echelon supply chain: a single retailer holds a finished goods inventory to meet an i.i.d. customer demand, and a single manufacturer produces the retailer's replenishment orders on a make-to-order basis. In this setting the retailer's order decision has a direct impact on the manufacturer's production. It is a well known phenomenon that inventory control policies at the retailer level often propagate customer demand variability towards the manufacturer, sometimes even in an amplified form (known as the bullwhip effect). The manufacturer however prefers to smooth production, and thus he prefers a smooth order pattern from the retailer. At first sight a decrease in order variability comes at the cost of an increased variance of the retailer's inventory levels, inflating the retailer's safety stock requirements. However, integrating the impact of the retailer's order decision on the manufacturer's production leads to new insights. A smooth order pattern generates shorter and less variable (production/replenishment) lead times, introducing a compensating effect on the retailer's safety stock. We show that by including the impact of the order decision on lead times, the order pattern can be smoothed to a considerable extent without increasing stock levels. This leads to a situation where both parties are better off.

Keywords: Inventory control, Queueing, Markov processes, Supply chain management

Suggested Citation

Boute, Robert and Disney, Stephen M. and Lambrecht, Marc and Van Houdt, Benny, A Smoothing Replenishment Policy with Endogenous Lead Times (January 26, 2006). Available at SSRN: https://ssrn.com/abstract=814428 or http://dx.doi.org/10.2139/ssrn.814428

Robert Boute (Contact Author)

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
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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