Coordinating Supply Chains by Controlling Upstream Variability Propagation

Abstract

Effective distribution using collaborative fulfillment networks requires coordination among the multiple participating firms at different stages of the supply chain. Acting independently, supply chain partners fail to weigh the cost burden they impose on upstream suppliers when their replenishment order quantities vary from period to period. This paper explores a new approach to coordinate multiple stages in the supply chain by controlling, through appropriate downstream inventory management, the demand variability that is propagated to upstream stages. We propose and analyze a coordinated inventory replenishment policy that uses "order smoothing" to reduce order-size variability and thus reduce overall system costs, including both inventory and transportation costs. We characterize the optimal parameter values for smoothing alternatives (such as exponential smoothing and moving weighted average policies), assess their economic benefits, and develop insights regarding supply chain contexts that might benefit most significantly from reducing the variability of orders to upstream stages. Using the distribution network for specialty brand appliances as an illustrative example, we demonstrate the potential cost savings that order-smoothing strategies can yield compared to the uncoordinated case when individual firms separately minimize their costs. The magnitude of savings depends on several factors, including the variability in consumer demand, level of product variety, and degree of inventory aggregation in the distribution system. Based on our analytical results, we develop a framework to assess cost reduction opportunities through variability control for different supply chain scenarios.supply chain coordination, inventory control, variability reduction, distribution systems, collaborative fulfillment, order smoothing

Information Sharing and Order Variability Control Under a Generalized Demand Model

“…Therefore, the retailer will always receive a full order from the supplier, but part of it may come from the secondary source. Under this assumption, which was also made in previous studies (Gavirneni et al 1999, Lee et al 2000, Balakrishnan et al 2004, the retailer's long-run average cost is the same as that of the ample supply case discussed in the previous section. Naturally, the supplier would incur a unit cost for using the secondary source.…”

“…Order variability could be a legitimate cost concern to the retailer's ordering decision. For example, the retailer may incur additional shipping and handling capacity cost when its order exceeds the normal variation range (Balakrishnan et al 2004).…”

“…Graves et al (1998) studied the productionsmoothing policies for a single production stage to optimize the trade-off between production capacity and inventory. Balakrishnan et al (2004) studied the benefit of a convex-combinational order-smoothing policy under the i.i.d. demand model.…”

A forecast-driven tactical planning model for a serial manufacturing system

“…Balakrishnan et al (2004) propose a coordinated inventory replenishment policy among the supply chain partners. They show that order smoothing rules dampen the variance propagation to upstream suppliers, and reduce total system costs.…”

The value of coordination in a two-echelon supply chain

“…Recent work on smoothing replenishment rules can be also found in Dejonckheere et al (2003aDejonckheere et al ( , 2003b and Balakrishnan et al (2004). Hoberg et al (2007) analyzed the effect of three inventory policies (inventory on-hand, installation-stock and echelon-stock policies) on supply chain performance.…”