T his paper studies supply chain demand variability in a model with one supplier and N retailers that face stochastic demand. Retailers implement scheduled ordering policies: Orders occur at fixed intervals and are equal to some multiple of a fixed batch size. A method is presented that exactly evaluates costs. Previous research demonstrates that the supplier's demand variance declines as the retailers' order intervals are balanced, i.e., the same number of retailers order each period. This research shows that the supplier's demand variance will (generally) decline as the retailers' order interval is lengthened or as their batch size is increased. Lower supplier demand variance can certainly lead to lower inventory at the supplier. This paper finds that reducing supplier demand variance with scheduled ordering policies can also lower total supply chain costs. This paper studies the management of supply chain demand variability in a model with one supplier, N retailers, and stochastic demand. Retailers implement scheduled ordering: They may order only every T periods, and their order quantities must equal an integer multiple of a fixed batch size, Q r . Scheduled ordering policies influence the propagation of demand variance within a supply chain. Lee et al. (1997) demonstrate that the supplier's demand variance depends on the alignment of the retailers' orders. The supplier's demand variance is maximized when the retailers' orders are synchronized, i.e., all N retailers order in the same periods. It is minimized when the retailers' orders are balanced, i.e., the same number of retailers order each period. Assuming balanced orders, this paper demonstrates that the supplier's demand variance is further reduced when the retailer order intervals are lengthened (T is increased) or when the retailers' batch size is reduced. The combination of these actions can dramatically dampen the supplier's demand variance. To illustrate, Figure 1 plots two simulations of supplier demand with 16 retailers. Each retailer's mean demand equals one unit per period. The supplier's demand variance is clearly higher when the retailers may order in any period, T ϭ 1. (In fact, when the retailers may order only every four periods, T ϭ 4, the supplier's demand is no more variable than overall consumer demand.) Yet, in each case the retailers order, on average, every four periods. In this model, lower supplier demand variance gives two primary benefits. One, for a fixed supplier fill rate, lower demand variance allows the supplier to carry less inventory on average. Two, for a fixed supplier average inventory, lower demand variance reduces the retailers' average lead time. (The retailers' lead time is the sum of two components, a fixed transportation time and a stochastic time due to 0025-1909/99/4506/0843$05.00
In a context where orders occur at fixed intervals, suppliers' demand variance will generally decline as the customers' order interval is lengthened REF .
Managing supply chain demand variability with scheduled ordering policies
Management Sci
Economics Business