Beyond Retail Stores: Managing Product Proliferation along the Supply Chain

Abstract

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Why Do Companies Need Operational Flexibility to Reduce Waste at Source?

“…To quantify the impact of operational flexibility on excess inventory, we model the evolutionary dynamics of demand forecasts. There are two types of demand models that can be used for such a purpose: (1) the additive demand model and ( 2) the multiplicative demand model [12,24]. The difference between the successive demand forecasts follows a normal distribution in the additive demand model, whereas the ratio of the successive demand forecasts follows a normal distribution in the multiplicative demand model.…”

“…[12] gives an example of a forecast-updating process such that demand planners use only the advance demand information to update the demand forecasts, which is modeled by a multiplicative demand model with a positive drift rate. When the forecasts are updated based on an unbiased judgmental demand process, the drift rate should be set equal to zero [12]. The multiplicative demand model, given by Equation (1), yields a lognormal distribution for the end demand, which is conditional on the demand forecast at t i :…”

“…This observation indicates that the accuracy of the demand forecasts improves over time as the time for the realization of the final demand approaches, which is consistent with practice. Therefore, the multiplicative model is very effective in capturing the dynamics of demand-updating mechanisms in practice [12,24]. We now apply the multiplicative demand model given by Equation ( 3) to develop the expected profit, optimal order quantity, and expected excess inventory derivations.…”

“…Following [12], we use a multiplicative demand process to model the evolutionary dynamics of demand uncertainty. Then, we quantify the impact of key modeling parameters for each operational-flexibility strategy on the waste ratio, which is measured as the ratio of excess inventory when a certain operational-flexibility strategy is employed to the amount when an offshore supplier is utilized without any operational flexibility.…”