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Simulation of Retail Supply Chain Behaviour and Financial Impact in an Uncertain Environment K. Cha-ume and N. Chiadamrong* School of Manufacturing Systems and Mechanical Engineering Sirindhorn International Institute of Technology Thammasat University, Pathumthani, Thailand, 12121 e-mail: navee@siit.tu.ac.th *Corresponding author Abstract: Traditionally, attention has been focused on uncertainty in customer demand. However, uncertainty is also inherent in the market on the supply side, because the quantity and quality of raw materials delivered from external suppliers may differ from those requested. This paper quantifies the financial impact of having uncertainty in a retail supply chain. Having unstable inventory records leads to profit losses in a supply chain. These inventory records may not be correct due to various causes such as transaction errors, misplacement, etc. These inaccuracies are caused by the uncertainties in customer demand, parts supply, and variations in the process itself. The aim of this paper is to examine the relationship between inventory inaccuracy and financial performance. The results indicate that each type of uncertainty can have different impacts on the chain, and the elimination of uncertainty can more or less reduce supply chain costs and hence increase profit. Keywords: Uncertainty, Financial impact, Retail supply chain, Information inaccuracy, Simulation Reference to this paper should be made as follows: Cha-ume, K. and Chiadamrong, N. (201x) ‗Simulation of Retail Supply Chain Behaviour and Financial Impact in an Uncertain Environment‘, Int. J. Logistics Systems and Management, Vol. x, No. x, pp. xx-xx. Biographical notes: Navee Chiadamrong is an associate professor at the School of Manufacturing Systems and Mechanical Engineering, Sirindhorn International Institute of Technology, Thammasat University, Thailand where he teaches and researches in the area of production planning and control methods and supply chain management. He received his Msc. Degree in Engineering Business Management from Warwick University and PhD in Manufacturing Engineering and Operations Management from University of Nottingham, UK. Some of his recent articles have appeared in International Journal of Production Economics, Computer and Industrial Engineering, International Journal of Manufacturing Technology and Management, European Journal of Industrial Engineering and TQM & Business Excellence. Kamolwon Cha-ume received her engineering degree in Industrial Engineering from Sirindhorn International Institute of Technology, Thammasat University, Thailand and her Msc. Degree in Supply Chain and Logistics Management from Warwick University, UK. She is currently PhD student at the Sirindhorn International Institute of Technology, Thammasat University. Her main research interests include collaboration and information sharing in supply chains and lateral transhipment problems.

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1. Introduction In the modern business world, considerable emphasis has been placed on Supply Chain Management (SCM). A supply chain is generally viewed as a network of facilities linked or coordinated by the flow of goods and services from suppliers through production to end customers with an information flow through the network (Shahabuddin, 2011). Three subsystems are recognizable in the supply chain: procurement, production, and distribution subsystems (Petrovic et al., 1998). They are interrelated in a way that decisions made at one of the subsystems affect performance of the supply chain as a whole. In recent time, many companies focus only on improving their own supply chian‘s performance to maximize their customer benefit without emphasizing on benefits to others players in the supply chain. Only if companies start focusing on the entire supply chain, can they realize maximum efficiency of a whole (Azadeh et al., 2011). Shahabuddin (2011) has stated that the purpose of the supply chain is to create value for customers by requiring all participants in the supply chain to work together in order to reduce the amount of inventory and facilitate a smooth flow of goods from the source to the end customer. As a result of this coordination, all the participants will be benefited. Currently many companies are faced with an increasing in risk exposure. This is mainly caused by a greater dependence between supply chain partners. (Kersten et al., 2011). To be competitive, the improvements in logistics and supply chain management are essential for all businesses (Diaz et al., 2011). One of the reasons why supply chain management is such a critical area of business is because there are many risks and uncertainties that can pose a serious threat to the integrity of the business. The collapse or inability to function of the supply chain can lead to disastrous results, and it is best that this is averted by any means possible (Merschmann, 2010). Therefore, in order to succeed in supply chain management, the understanding and assessment of these risks and uncertainties are the fundamental steps (Ganguly et al., 2011). 2. Literature Review A great deal of research has been done in the area of supply chain dynamics. A widely used approach to study supply chain dynamics has been based on the system dynamics methodology (Forrester, 1961; Towill, 1991; Sterman, 2000; Sodhi, 2001). This dynamic model is a deterministic mathematical description of the supply chain, which is then used to simulate supply chain dynamic behaviour. Another approach used to study supply chain dynamics has been based on modelling a supply chain as a discrete event system (Banks et al., 2002). Results of interesting research have been reported in Southall et al. (1988) in which their model has included uncertainty in customer demand and factory lead time, which followed specified probability distributions. Effects of a step wise change in customer demand were simulated. In a supply chain, there are many aspects and operations that are susceptible to uncertainty. Supply chain uncertainty can be defined as factors that cannot be controlled or eliminated in the operation of a supply chain. This uncertainty cannot be measured or forecasted with accuracy but can yield positive results. However, due to globalization of customers, companies need to be flexible and more adaptive enough to satisfy more demanding customers as well as provide a high service level for customers (Swafford et al., 2004). The concept of uncertainty has been defined in various ways by several studies (Duncan, 1972). Decision theorists define uncertainty as the situation where the probability of the outcome of

Hammami et al. is unable to accurately predict the impact of possible control actions on supply chain behavior. However. there are situations where not all these requirements are satisfied. Davis (1993) also identified three distinct sources of uncertainty in supply chains: supply uncertainty. uncertainties in parameters can be specified based on managerial experience and subjective judgement. Lawrence and Lorsch (1967) and Duncan (1972) viewed uncertainty as consisting of three components: (1) a lack of information regarding the environmental factors associated with a given decision-making situation. 1998). In these situations. as to how environmental factors are going to affect the success or failure of a decision unit in performing its function. and uncertain environmental variables that affect the optimum. lack information processing capacity.. It has long been theorized that there is a relationship between variability and performance (Bhatnagar and Chandra. 2009) especially as a crucial part of global supply chain. Different sources of uncertainty in a supply chain can exist. According to Van der Vorst and Beulens (2002). (2) not knowing the outcome of a specific decision in terms of how much the organization would lose if the decision were incorrect. being significant to its configuration (Melo et al. Process uncertainty results from the unreliability of the . The importance of financial decision in supply chain management has been highlighted by many researchers (Shapiro. the uncertainty occurs when information becomes unreliable for effective decision-making or prediction of the outcome of a decision. Treating uncertainty is an important issue in supply chain modelling and analysis of supply chain behaviour and performance (Petrovic.. 2004. and demand uncertainty. as in the case of launching a new product. A probability distribution is usually derived from evidence recorded in the past. 2009). encompassing suppliers. Supply uncertainty is caused by the variability of supplier performance due to late or defective deliveries. or lacks effective control actions.3 an event is unknown. Papageorgiou. Deming (1986) went so far as to propose that the key aim of management is to control variability in order to ultimately lower costs. and therefore. the more productive processes should be. even low‖ argues that reduced variance in materials flow and operational activities contribute to improved performance (Schmenner and Swink. and (3) inability to assign any degree of confidence. or simply evidence may not exist. Uncertainties in parameters in supply chain management and control problems have been treated as stochastic processes and described by probability distributions. and that the stochastic mechanism generating the recorded data continues in force on an unchanged basis. as opposed to a risk situation where each outcome has a calculated probability (Luce and Raiffa. For example. process uncertainty. 1957). 2008. Applying these definitions to the contexts of a supply chain. The more consistent the flow of materials. 2001). supply chain uncertainty refers to a decision making situation in the supply chain in which the decision maker does not know definitely what to decide. there may be a lack of evidence available or lack of confidence in evidence. Moreover. The general operations management theory of ―swift. and this implies improved financial performance (Germain et al.. (2010) suggested that an effective way to optimize simulated systems involves using Taguchi's worldview to separate decision variables that are to be optimized. 1994). as he is unclear about the objectives: lack of information about its environment or the supply chain. This requires a valid hypothesis that evidence collected is complete and unbiased. the conventional probabilistic reasoning methods are not appropriate. Dellino et al. production/manufacturing processes and customers. This uncertainty also occurs when there are unpredictable changes in the system. 2001).

It is seen that the inventory accuracy is only 51% on average for 500 stores. companies started to automate their inventory management processes and use inventory management software (Lee and Ozer. The epistemic uncertainty refers to sampling the mean of uncertainty. 1999. Like all practical simulation optimization methods. caused by random events. lack of evidence available. In joining a chain. or lack of certainty in evidence. and addition. Simulation Optimization In this study.000 SKUs were investigated for the retailer. demand uncertainty. and Neural Networks (NN) (Glover et al. De Rocquigny et al. In our problem. speaking of different types of demand uncertainty. Helton (2009) proposed that the aleatory uncertainty arises from an inherent randomness in the properties or behaviour of the system under study while the epistemic uncertainty derives from a lack of knowledge about the appropriate value to use for a quantity that is assumed to have a fixed value in the context of a particular analysis. the OptQuest is also an iterative heuristic (Kleijnen. The OptQuest also allows the user to explicitly define integer and linear constraints on the deterministic simulation inputs. The best performing store in the study knows its actual inventory with only 75-80% accuracy. Moreover. the double probabilistic setting should be taken into account. Keskin 2010). which according to Davis (1993) is the most serious of the three. shrinkage. transaction errors. The data collected may not be accurate due to various reasons: incorrect product identification.. it requires the selection of the (random) simulation output that is the goal or objective variable to be maximized. but the aleatory uncertainty is instead sampling the demand for an appropriate mean. we select the maximization of the whole chain‘s profit as an objective. inaccessibility of items due to improper usage of the depot. Tabu Search (TS). arises from volatile demand or inaccurate forecasts. imprecision in judgment. The OptQuest package can also be used to combine with other simulation software systems (Kleijnen. 2008). These may result in two problems: unplanned inventory depletion. (2001) reported similar findings for a leading retailer. As a result of advances in information technologies. Kang and Gershwin (2005) reported inventory accuracies of a global retailer‘s stores. Finally. the tracking of inventory remains prone to error. (2008) has proposed that there are two components of the double probabilistic setting: epistemic and aleatory uncertainty. An example of successful application of scatter search within OptQuest is reported by Bulut (2001) to solve a multiscenario optimization problem based on a large-scale linear programming model. 2005). 3. In other words. It can be used to utilize a combination of three meta-heuristics: Scatter Search (SS).4 production process due to machine breakdowns. 2008). It requires the specifications of lower and upper values for the input variables that are to be optimized. However. Raman et al. either an order may not be placed in time or excessive inventory is held. the simulation and optimization procedure are completed by using ARENA commercial software and the OptQuest tool. etc. Supply chain inventory management decisions also depend on inventory data gathered from automated or manual control systems. If the inventory records do not agree with the actual physical stock. Although the use of Information Technology (IT) has made collecting and storing data about the flow of items through a supply chain easier and less expensive. the stores have accurate records for only about a half of the SKUs (Stock Keeping Units). Almost 370. In fact. these uncertainties may be different in nature. It was concluded that more than 65% of the inventory records do not match with the physical inventory. it should be guaranteed that all members are better off by creating a . misplacement of items.

the objective functions are not expressed as explicit functions of the input parameters. and transportation. The lead time includes the time necessary for order processing.Replenishment quantities for each inventory are received within a given. the non-negativity constraints to guarantee that all members must at least gain profit (profit of each member ≥ 0) were also set in the study. and penalty costs are incurred. Swisher et al.. A normal distribution with a mean of 2 hours and 25%. such that an expected system performance from stochastic simulation is optimized (Kleijnen.The manufacturer is assumed to know the retailers‘ demand in the base case for eight weeks in advance. Assumptions concerning the system operations are as follows: . The maximum target stock level of each retailer (TSL) is set up periodically to a certain level. This is considered to be the aleatory uncertainty. rather they normally involve some performance measures of the system whose accurate values can be found only by running the simulation model. The interest in simulation optimization is to find which of a large number of sets of model specifications have led to the optimal output performance (Vaghefi et al. the uncertainty in customer demand has no effect on changing the pattern of the calculated plans. Retailer 2. Three retailers place orders to the manufacturer at the end of each week.. The plan will be updated each time before producing a new batch of production. such as our case. At this point. System Configuration Figure 1 shows the scope of the simulated retail supply chain. 5. 2000. As a result. After a constant delivery lead time of 2 days. whereas the supplier of the manufacturer is not included in the study. When demand exceeds the available stock. is studied. 2002. unmet demand is considered to be shortages. production. . which is optimized by the OptQuest.End customer demand is fulfilled from the shop‘s inventory. 1987. Law 2007). to refill their stock up to individual maximum stock keeping levels or target stock level (TSL). This is to gain a better understanding of the retail supply chain dynamic behaviour and performance in the presence of various sources and types of uncertainty. Basic Model Assumptions An illustrative case of having uncertainty in a retail supply chain. and 75% of its mean set to be the standard deviation is used for Retailer 1.Retailers are differentiated by different standard deviations of the customers‘ inter-arrival times under the same value of mean (2 hours). in which the manufacturer uses this information to update its ordering and production plan for the finished products using the Wagner-Within algorithm with an 8 weeks rolling planning horizon. Fu. the ordered units will arrive at the retailers. consisting of three retailers and a manufacturer. At this . and Retailer 3. Simulation optimization is defined as the process of finding the values for the input variables. which is inherent randomness in the retailers‘ demand.The inventory in each retail shop is controlled based on a periodic review policy. . 2009). 2008.5 win-win situation for all members. respectively. . 4. The whole chain consists of three retailers and one manufacturer. For analyzing complex systems. 50%. . A built-in Visual Basic sub-model was written and interfaced with the main ARENA simulation model to generate the rolling production plans of the manufacturer. planned lead time.

. As the variation of the customers demand follows the normal distribution. the inter-arrival times of the customers at Retailer 1. Customer Demand (Inter-arrival time of customers) Figure 1: Overview of the studied retail supply chain 5. The supply uncertainty is represented by the uncertainty of the product delivery lead time. and in the high level. the variation on the mean is introduced by the expression of the uniform (2*0. This missed quantity may be caused by the lack of coordination among a supply chain‘s members. the mean can vary in the range of ±50%. It encompasses the inconsistency in product flows into. we are setting different levels of variation in demand. the mean inter-arrival time of customers will follow the uniform distribution varying from 1. Finally. such as misplaced items or even theft during the delivery.1. there are two levels of effects. For example. in the case of a low level of the demand uncertainty. and process uncertainties. This inaccuracy is caused by an uncertainty in logistics operations. the process uncertainty is represented by the uncertainty of the delivering product quantity to the shops which is called a missed quantity.25) = uniform (1. Retailer 2. and process to study their effects that may occur in the supply chain system. the mean can be varied within a range of ±25% (swinging on both sides with an equal chance from the base case‘s mean). 50%. 2*1. At the low level.5.5. Epistemic Uncertainty in the system There are three types of epistemic uncertainty in the system which are: demand. that will be investigated.5 to 2. and 75% of the mean being set for its standard deviation. At the low level of demand uncertainty for Retailer 1. This represents inaccuracy caused by the accuracy of demand forecasting. and Retailer 3 are normally distributed with the mean stated above and 25%. as well as internal variability. the shop. 2.75. supply. The demand uncertainty is represented by the uncertainty of the rate of customer arrival at the shop. In all three types of uncertainty. low and high.6 point. and out of. supply.5) as can be seen from Figure 2.

supply and process 5. Objective Function and Financial Performance Measures In this section. Notations Sm Sr Om Or Cm Cr ns(m) = Selling price of manufacturer ($/unit) = Selling price of retailers ($/unit) = Ordering cost of manufacturer ($/order) = Ordering cost of retailers ($/order) = Production cost of manufacturer ($/unit) = Operating cost of retailers ($/unit per unit time) = Sales volume of manufacturer (units) .2.7 Figure 2: Epistemic uncertainties in demand. the objective function. financial performance measures and their notations will be introduced.

2. the transportation cost is included in the ordering cost in this study. Sm x ns(m) (1). Om x rm (3).1. RM Cost is calculated from a raw material cost per unit (RMm) multiplied with the number of purchased raw material (n RM(m)). Objective Function and Constraints Maximize Profit of the whole chain = Manufacturer profit + (Retailer 1’s profit + Retailer 2’s profit + Retailer 3’s profit) where Manufacturer Profit = Sales – Total Costs = Sales – (RM Cost + Ordering Cost + Production Cost + Holding Cost + Transportation Cost + Penalty Cost) where Sales is calculated from a selling price per unit (Sm) multiplied with the sales volume (ns(m)). RMm x n RM(m) (2). Production Cost is calculated from a conversion cost per unit (Cm) multiplied with the number of purchased raw material (nRM(m)). It is calculated from the ordering cost (Om) multiplied with the total number of orders (rm) made by the manufacturer. In some instances. Cm x nRM(m) (4). So. the manufacturer may take responsibility to deliver the ordered product itself and the transportation is also charged per order. . Ordering Cost is the cost incurred when the manufacturer places an order for raw materials.8 ns( rm = Sales volume of retailer i (units) = Number of orders of manufacturer (orders) = Number of orders of retailer i (orders) RMm = Raw material cost of manufacturer ($/unit) RMr = Raw material cost of retailers ($/unit) hm = Holding cost of parts per unit time at manufacturer ($/unit per unit time) hr = Holding cost of parts per unit time at retailers ($/unit per unit time) Pm = Penalty cost of manufacturer ($/unit) Pr = Penalty cost of retailers ($/unit) n RM(m) = Number of raw materials purchased by manufacturer (units) = Number of raw materials purchased by retailer i (units) tm = Average holding time of parts at manufacturer (unit time) = Average holding time of parts at retailer i (unit time) = Operating time duration of retailer i (unit time) n(m)miss = Number of lost sales at manufacturer (units) n ( )miss = Number of lost sales at retailer i (units) ai = Average number of units in the shop of retailer i (units) ) 5.

Ordering Cost is the cost incurred when the retailer places an order. the ordering cost also includes the transportation cost.(RMm x n RM(m) + Om x rm + Cm x nRM(m) + hm x nRM(m) x tm + Pm x n(m)miss) And for: Retailers’ Profit = Retailer 1‘s profit + Retailer 2‘s profit + Retailer 3‘s profit = Sales – Total Costs = (Sales) – (RM Cost+ Ordering Cost + Operating Cost + Holding Cost + Penalty Cost) where Sales is calculated from a selling price per unit (Sr) multiplied with the sales volume for each retailer ( ) 3 Sr  ( ) (8).  i 1 3 (12). As a result. It is calculated from the penalty cost per unit (Pm) multiplied with the number of lost sales (n(m)miss). Hence. r i 1 3 (10). Similar to the manufacturer case. Operating Cost is the cost of operating the retailer shop. Pm x n(m)miss (6).9 Holding Cost is calculated from the holding cost of a unit per unit time at the manufacturer (hm) multiplied with the number of purchased raw material (nRM(m)). It is calculated from the operating cost of a unit per unit time (Cr) multiplied with the average number of units held in the shop (ai) and multiplied with the operating time duration of each retailer ( ). and multiplied by the average holding time of parts at manufacturer (tm). Penalty Cost is the cost incurred when the manufacturer fails to satisfy the retailer demand. i 1 RM Cost is a raw material cost per unit (RMr) multiplied with the number of purchased raw materials from the manufacturer for each retailer ( ) 3 RMr  i 1 (9). 3 hr  i 1 x t (11). It is calculated from the total number of ordering cost ( ) multiplied with the number of orders for each retailer ( ). Manufacturer Profit is calculated by: Sm x ns(m) . hm x nRM(m) x tm (5). . the retailers take a responsibility to deliver the products themselves. It is calculated from the holding cost of a unit per unit time for each retailer (hr) multiplied with the number of units held ( ) and multiplied by the average holding time of parts at each retailer (t ). (7). Holding Cost is the cost of holding products in the shop.

x t + Cr  ai i 1 3 Hence. These variables will be searched for their optimal setting by the OptQuest.16/unit per week (≈ 40% of selling price per year) = $20/unit = $5/unit = $ 250/order ≥0 ≥0 ≥0 ≥0 • = $50/unit = $0. • Manufacturer – Selling price – RM cost – Holding cost – Penalty cost – Production cost – Ordering cost – Retailer – Selling price – Holding cost – Penalty cost – Operating cost – Ordering cost = $20/unit = $5/unit = $0. The lower and upper bounds of the searching boundary in each variable are guaranteed to be large enough to ensure that the optimal setting falls inside the boundary.4 Parameter Values (costs. as they are usually not reported. It is in line with the cost structure of day to day convenience goods sold in general convenience stores in practice. Non-negativity constraints: Manufacturer‘s profit Retailer 1‘s profit Retailer 2‘s profit Retailer 3‘s profit 5. It is calculated from the penalty cost per unit (Pr) multiplied with the number of lost sales at each retailer (n ( )miss). which are the target stock levels at Retailer 1. a spread sheet file in MS Excel was built in this study as a means to input the cost structure.(RMr  i 1 i 1 i 1 i 1 + Pr  n ( )miss) i 1 (14). In fact. prices. etc.40/unit per week (≈ 40% of selling price per year) = $50/unit = $2/unit per week = $250/order .10 Penalty Cost is the cost incurred when the retailer fails to satisfy the demand. Pr  n ( i 1 3 )miss (13).3 Decision Variables There are three decision variables in the model. is another area where further study is needed. this cost structure can affect the findings. Retailer Profit is calculated by: 3 3 3 3 Sr  n3 +  r + hr  s( ) . Even though. 5. the sensitivity analysis of some cost parameters. When a new cost structure is proposed.) The following cost structure is used throughout our experiment. Retailer 2 and Retailer 3. a new finding can easily be presented.

Effect of Aleatory Uncertainty The retailers are differentiated by the different variations of the customer‘s inter-arrival time while keeping the same mean (2 hours) at each retailer.5.5 minutes. The warm-up run of 180 days proved sufficient to generate stable estimates of the steady-state results. In summary. Please note that the base case is referred to the case without epistemic uncertainty. who has the largest demand variation.11 5. respectively. a 95% confidence interval for the throughput has a width less than 1. and 1. shows to have the highest target stock level as expected. The results can be presented as follows: Table 1: Model abbreviations Model LD HD LL HL LM HM Meaning Model with LOW level of DEMAND uncertainty Model with HIGH level of DEMAND uncertainty Model with LOW level of LEAD TIME uncertainty Model with HIGH level of LEAD TIME uncertainty Model with LOW level of MISSED QUANTITY uncertainty Model with HIGH level of MISSED QUANTITY uncertainty 6. After.5. 6. the aleatory uncertainty was presented by setting the distribution of the customer inter-arrival time of Retailer 1. Retailer 2. Results Table 1 shows the list of abbreviations of the models under the study. but there is aleatory uncertainty from setting different inherent randomness in Retailer 1. The Tukey comparison test is used to compare the means of cost among the interested models. Based on 10 replications. Retailer 2 and Retailer 3 following the normal distribution with the mean equal to 2 minutes while the standard deviation is 0. it applies simultaneously to the set of all pairwise comparisons and identifies where the difference between two means is greater than the standard error would be expected to allow. Table 2: Optimized Target Stock Level from OptQuest Retailer 1 (units) Retailer 2 (units) Retailer 3 (units) Base Case 114 117 120 . Steady-state Conditions Ten replications were simulated with 360 days per replication after an initial warm-up period of 180 days.1. the result of the optimized target stock levels are shown in Table 2 where Retailer 3. that is. optimizing the base model without epistemic uncertainty by the OptQuest. 1.5% of its mean. and Retailer 3.

008. and Retailer 3 increases. who has the largest demand variation. has the worst financial performance.00 95.230.055.00 90. holding and penalty costs.86 12. The obtained optimized target stock levels of each scenario from the OptQuest can be seen in Table 4. In addition.00 215.86 12.00 Profit ($) 111.850. But a lower target stock level (keeping less inventories) was suggested when there is process uncertainty. The presented numbers are the averaged costs per replication (from 10 replications).00 84.00 6.558.56 106. Retailer 2.987.018. Table 3: Financial performance measures of the retailers under the base case Retailer (i) Retailer 1 (R1) Retailer 2 (R2) Retailer 3 (R3) Revenue ($) 216. This basically stemmed from the normal distribution created demand (inter-arrival time) of customers of Retailer 3.00 85.00 1.09 4.795. which has the largest variance as compared to those of Retailer 1 and Retailer 2.850.850.00 1. the trend of optimal target stock level of the base case and the models with a low level of uncertainty in demand.01 5. as compared to the base case. This is since there is a chance that extra stock could be delivered in the future. Effect of Epistemic Uncertainties The profits of all members and the whole chain were investigated to find which epistemic uncertainty may cause a greater impact on the profits.00 210. and process keeps increasing as the variation of the customer demand of Retailer 1. the retailers have tried to protect the effect of uncertainty by keeping higher inventories through setting a higher target stock level. supply. This is to prevent possible lost sales when there is more uncertainty in the system.996.144. . Table 4: Optimized Target Stock Levels of each scenario from OptQuest Scenario Base Case LD LL LM HD HL HM Retailer 1 (units) Retailer 2 (units) Retailer 3 (units) 114 118 117 104 142 121 105 117 123 120 105 122 123 104 120 124 121 108 118 124 100 It was found that when there is demand and supply uncertainty.00 Penalty Cost ($) 25.568.43 12.131.115. and those exceeding inventories may not be sold.88 5. The reason for the lower profitability of Retailer 3 in relation to Retailer 1 and Retailer 2 is due to a reduction of revenue as well as an increase in operating. It can be seen that the variation in demand has an inverse effect on the profitability.00 86.12 Table 3 shows financial performance measures of the retailers under the base case.035.2. It was found that Retailer 3.26 Holding cost ($) Operating cost Reorder Cost RM Cost ($) ($) ($) 986.05 109.370.

Retailer 2. the profit of the whole chain is reduced by 2.41%. there are two possible outcomes. Table 5: Profits in the retail supply chain The profits of the whole chain and each member under different scenarios of uncertainty are presented in Table 5. Retailer 2. Therefore. For example. with the case of having more inventories as the demand and process uncertainties only set to swing up (+25% or +50%). as the demand and process uncertainties only set to swing down (. due to a higher inherent aleatory uncertainty of each retailer. and Retailer 3 shows a decrease due to the fact that the variation of the customer‘s demand for Retailer 1. and a higher level of uncertainty can cause more or less even more severe negative impact. for the model with a low level of demand uncertainty (LD). and Retailer 3 shows an increase similar to the base case. . Retailer 2. On the contrary. the trend of the target stock levels of Retailer 1. From a detail analysis where we managed to swing the uncertainties in the demand and process half way (either swing up or swing down). This is because there is a high chance that the kept inventory may not be sold. the trend of the optimal target stock levels of Retailer 1.25% or -50%). it was found that. With this case. it is more profitable to keep less inventories in the shop. Having applied various uncertainties in the models to investigate their effects under the optimal setting conditions of the interested parameters (target stock level of the retailers). while for the model with a high level of demand uncertainty (HD). The first outcome results in having less inventory.53% in relation to the base case‘s profit. it was found that the uncertainties cause a negative impact on the whole chain‘s profit. and Retailer 3 increases.13 When the uncertainty is set to the high level except for the case of high supply uncertainty (in which the uncertainty in lead time shows the least significant effect). as shown in Table 5. the retailer is advised to keep less inventory (setting lower target stock level) as the uncertainty increases. the profit is reduced up to 12.

00 100.000.00 150.000.000. The demand uncertainty demonstrates a significant effect on the whole chain and particularly on the retailers‘ profit.00 50.00 250.00 350.00 450.000.000.000.00 50.00 400.00 300.000. This is due to the fact that the manufacturer always sets its production 8 weeks in advance due to a retailer‘s demand .000.00 100.000.00 Base Case LL HL Profit ($) Manufacturer's Profit ($) Retailers' Profit ($) Whole Chain's Profit ($) Process Uncertainty 500.00 200.00 350.000.000.000.00 450.00 100.000.000.000.000.00 400.000.000.000.00 150.00 250.00 50.000.000. it can also be noticed that the demand and process uncertainties (missed quantity) show negative effects on the supply chain profitability.00 150.000.00 350.000.00 400.000.00 300.00 Base Case LM HM Profit ($) Manufacturer's Profit ($) Retailers' Profit ($) Whole Chain's Profit ($) Figure 3 : Profits of each retailer and the whole chain under each type of uncertainty From Figure 3.000.000.000.00 200.14 Demand Uncertainty 500.00 450.00 250.000.00 Base Case LD HD Profit ($) Manufacturer's Profit ($) Retailers' Profit ($) Whole Chain's Profit ($) Supply Uncertainty 500.000.00 200.000.00 300. but no significant change in the manufacturer‘s profit.

as shown in Table 6. manufacturer. Effect of Epistemic Uncertainties on the Manufacturer According to the Tukey comparison test‘s results on the manufacturer‘s profit presented in Figure 4. when there is the demand uncertainty. As for the process uncertainty.I.I. ordering and . or the whole supply chain profits under each optimal target stock level condition providing that it is varied up to 50% from the normal level. 1) Result from Tukey 95% C. This is to rank the profits under uncertain conditions from maximum to minimum as compared to the base case where there is no epistemic uncertainty. This is due to the difference between the number of units ordered and actual units delivered from the manufacturer. Hence. which is reduced according to this uncertainty. in the case of process uncertainty. However.I. When the process uncertainty swings up.15 without epistemic uncertainty. Please note again that underlined models denote models that cannot distinguish their profits under a 95% C. it does not show any effect on the manufacturer‘s production plan. as the uncertainty in demand swings both up and down. some delivered units are presumably lost during the delivery. The Tukey comparison test results also confirm that there is no significant impact of lead time uncertainty on profits as compared to other uncertainties. more excessive units are delivered from the manufacturer but when the process uncertainty swings down. comparison of the Whole Chain’s Profit Demand uncertainty Base LD HD Supply uncertainty Base LL HL Process uncertainty Base LM HM Note: Profits are ranked from maximum to minimum Figure 4: Tukey 95% C.I. the manufacturer still produces the same production level as in the base case. In fact. When the process uncertainty occurs. This is mainly due to a decrease in the revenue of the manufacturer.I. comparison of the Retailers’ Profit Demand uncertainty Base LD HD Supply uncertainty Base LL HL Process uncertainty Base LM HM 3) Result from Tukey 95% C. it does not show much effect on the manufacturer‘s profit. comparison test of the profits under the uncertainty 6. A Tukey comparison test of each member‘s profit is also shown in Figure 4. the profit of the manufacturer is proven to be lower by the comparison test when the level of uncertainty increases.1. the raw material. The supply uncertainty (lead time) fails to show a significant change in retailers.2. As a result. comparison of the Manufacturer’s Profit Demand uncertainty LD Base HD Supply uncertainty LL Base HL Process uncertainty Base LM HM 2) Result from Tukey 95% C. the demand and lead time uncertainties show insignificant effect on the manufacture‘s profit. there is a negative effect for all members and the whole chain.

670.00 217.00 12.837.13 4.55 71.00 6. Investigating each retailer reveals that there are some variations in the results. This can lead to a lower holding cost.04 1.507.420.71 5.265.13 7.31 100.83 1.085.00 73.2.97 Holding Operating Cost ($) Cost ($) 986.362.562.480.83 4.131.987.828.568.560.00 13.170.00 24.86 1.26 102.00 85.65 1.70 903.393.09 4.307.51 4. the penalty cost from lost sales will increase while the manufacturer‘s revenue is reduced.56 106.00 184.00 80.160.165.665.54 106.230.80 4.46 66.378.764.00 200.126.00 202.94 926.105.00 9.00 Profit ($) 111. On the other hand. if the process uncertainty swings down (-25% or -50%).02 862.810.37 1.00 205.78 5.453.317.97 4. If the process uncertainty swings up (+25% or +50%).68 1.005. the number of delivered units to the retailers will be higher than it should have been.00 210.143.00 191.37 948.00 211. profits.336.00 76.00 215.04 86.984.362. Table 6: Performance measure of the manufacturer under process uncertainty 6.00 95.779.43 5.010. Table 7 also shows the revenues.795.220.00 25. Effect of Epistemic Uncertainties on the Retailers Supply uncertainty (lead time) with both levels show no significant effect on the retailers.008.715.006.00 90.00 84.00 82.084.00 86.900.290.2.00 80.815.16 production costs are nearly the same as those of the base case‘s scenario.83 92.00 202.17 91.03 5.00 RM Cost ($) 86.00 25.395.770.00 84.692.95 5.018.945.726.704.00 190.00 3.01 5.688. while the demand and process uncertainties demonstrate some effects.782.00 85.53 87.00 11.00 16.996.00 88.035.055.00 75.670.276. more products will be taken out from the manufacturer‘s inventory.88 5.905.00 214.375.370.369.45 Penalty Cost ($) 25.981.345.558.796.00 85.630. As a result. Since products are lost from the system.69 885. Table 7: Financial performance measures of the retailers under demand and process uncertainty Revenue ($) Retailer 1 Base Case Retailer 2 Retailer 3 Retailer 1 LD Retailer 2 Retailer 3 Retailer 1 HD Retailer 2 Retailer 3 LM Retailer 1 Retailer 2 Retailer 3 Retailer 1 Retailer 2 Retailer 3 216.00 1.00 213.144.00 222.77 4.43 1.862.86 1.48 898.97 71.250.368. and all related costs of all retailers under demand and process uncertainties.60 90.00 22. some delivered units will presumably disappear from the system during the delivery.00 HM .525.876.225.05 109.934.288.105.650.00 81.68 105.505.115.

and raw material costs seem to follow the same pattern.17 This variation has been proven by the statistical analysis as shown in Table 8 (Tukey comparison test) as well as in the plot between the profit and conditions under the demand uncertainty shown in Figure 5. Retailer 1 pays the highest amount among retailers as more products are kept in the shop. despite the fact that the revenue of Retailer 1 is increased. Note: B = Base case L = Low level of demand uncertainty H = High level of demand uncertainty . The penalty cost is shown to increase as the level of uncertainty increases while the holding. The demand uncertainty has a negative impact on all retailers‘ profit. while revenues drop for the case of Retailer 2 and Retailer 3 when the level of uncertainty is changing from a low level to a high level (as also shown in Table 7). This is corresponding to the higher target stock level of Retailer 1 under the high uncertainty level as mentioned earlier. Table 8: Tukey comparison test of demand uncertainty on the performance measures of the retailers Demand Uncertainty Retailer 1 Retailer 2 Retailer 3 Revenues H B L L B H L B H Profit H B L L B H L B H Holding Cost B L H B L H B L H Operating Cost H L B H L B L B H H L B Penalty Cost H L B L B H RM Cost H L B L B H H L B Ranking: All measures are ranked from maximum to minimum. operating.

500 10.000 Profit 110.000 Retailer 1 Retailer 2 RM Cost Cost ($) Cost($) 86.000 80.000 80.500 220.500 205.000 95.000 82.000 6. When this uncertainty increases.500 Operating Cost 7.000 88.500 15.500 7.000 2.600 1.500 20.000 207. It was found that the process uncertainty also has a negative impact on the revenues and profits of all retailers.500 5.000 85.000 84.000 212.000 900 Base case LD HD Retailer 3 4.200 5.500 215.000 105.500 Cost ($) Retailer 1 Retailer 2 6.18 Revenue 225. revenues and profits drop as their penalty costs rise up sharply.000 202.000 1.000 Retailer 1 Retailer 2 1.400 Cost ($) 1.000 Profit ($) Retailer 1 Retailer 2 Revenue ($) 100.000 Base case LD HD Retailer 3 Penalty Cost 22.000 Base case LD HD Retailer 1 Retailer 2 Retailer 3 Retailer 3 Holding Cost 1.000 7.000 222.000 12.500 210. Note: B= Base case L= Low level of process uncertainty H= High level of process uncertainty Table 9 and Figure 6 show the Tukey comparison test and the plot of all measures under the process uncertainty.300 1. Even though the raw material cost shows a .000 17.500 0 Base case LD HD 90.100 1.000 217.500 5.500 4.000 Base case LD HD Retailer 1 Retailer 2 Retailer 3 Retailer 3 Figure 5: Retailers‘ financial performance measures with the demand uncertainty Table 9: Tukey comparison test of process uncertainty on the performance measures of retailers Process Uncertainty Retailer 1 Retailer 2 Retailer 3 Revenues B L H B L H B L H Profit B L H B L H B L H Holding Cost B H L B L H B L H L Operating Cost B H L B H B L H Penalty Cost H L B H L B H L B RM Cost B L H B L H B L H Ranking: All measures are ranked from maximum to minimum.500 Base case LD HD 115.000 90.

which are charged to the number of units held in the shops.500 Retailer 1 Cost ($) Cost ($) 5.000 78. the inventories in the shops are not much different. seem to be quite stable when the process uncertainty has changed from a low level to a high level.000 90.000 0 Base case LM HM 74.000 195.000 70.000 200.000 190.000 215. All models under the epistemic uncertainty have also been optimized by The OptQuest in order to find the optimal target stock levels.000 Base case LM HM Retailer 2 Retailer 3 Retailer 3 Holding Cost 1.000 Revenue ($) Profit ($) 100.000 Base case LM HM Penalty Cost 30. .000 5.000 950 900 850 800 Base case LM HM Operating Cost 6.19 decrease due to the fact that the target stock levels become lower in relation to the base case. Revenue 220.100 1.000 185.000 70.000 RM Cost Cost ($) Cost ($) 20.000 60.000 Base case LM HM Profit 120.000 4.000 Retailer 1 82.000 Retailer 1 Retailer 2 Retailer 3 Retailer 2 Retailer 3 5.000 180.000 15.500 Retailer 1 Retailer 2 Retailer 3 Retailer 2 Retailer 3 4.000 110.000 210.000 90. As a result. This is since the order quantity can be missed in both directions (either exceed or shortage).000 Base case LM HM Figure 6: Retailers‘ financial performance measures with the process uncertainty 6.000 25.150 1.200 1. the holding and operating costs. Table 10 summaries the financial results when there are interaction effects from the interested uncertainties and Figure 7 shows ANOVA of total profit from the experiment.050 1.000 Retailer 1 Retailer 1 Retailer 2 80.000 86.000 10.000 205.3 Analysis of the effect of epistemic uncertainties with interaction effects Full factorial design with 8 scenarios ( ) has been performed.

50 50.877.590.18 37.00 183.375.84 70.00 198.87 1.00 19.24 1.760.52 4. LD + HL + HM 6.88 74.877.00 Profit ($) 96.382.878.20 50.00 78.00 63.312.877.00 80.79 3.80 5.00 79.00 251.00 207.530.23 63.00 204.991.50 5.79 5.902.00 81.76 4.87 89.50 5.01 3.00 6.00 18.581.51 4.902.00 14.877.087.39 3.230.00 185.050.48 7.852.50 27.073.032.00 3. HD + LL +HM 4.65 1.480.428.00 79.82 797.128.00 77.69 88.00 82.067.315.182.04 102.855. HD + HL + LM 3.61 57.59 5.400.220.028.064.00 39.680.00 33.591.363.40 1.368.00 83.65 68.877. HD + LL + LM 5.138.589.39 827.515.489.970.058.17 70.013.070.775.582.200.695.176.05 954. LD + LL + HM 8.708.13 67.50 31.00 63.132.20 Table 10: Financial performance measures under the interaction effects Revenue ($) Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 Manufacturer Retailer 1 Retailer 2 Retailer 3 246.00 191.21 989.622.57 78.877.877.00 63.373.00 202.00 252.495.435.50 4.00 63.14 5.729.615.600.00 248.715.874.696.943.92 4.00 15.00 83.81 82.356.861.00 22.740.756.00 76.00 201.50 4.112.00 36.00 1. HD + HL + HM 2.233.933.21 94.07 80.05 979.00 75.625.43 63.877.00 70.004.974.82 53.776.675. LD + HL + LM 7.50 4.650.945.938.16 1.56 68.056.476.00 179.240.877.00 177.055.010.441.31 63.00 203.026.73 105.12 1.00 194.604.00 63.81 63.174.290.872.522.00 85.825.00 199.73 5.50 5.500.140.00 74.80 1.302.00 27.00 76.185.260.50 32.520.20 910.429.434.55 63.87 1.92 86.00 13.79 89.23 3.00 252.795.60 1.581.00 63.44 911.715.206.00 202.041.78 100.01 105.060.070.50 4.00 75.900.00 81.460.815.92 Operating Cost ($) 63.00 188.00 73.171.00 213.33 93.281.867.00 10.500.545.34 1.50 14.490.030.203.605.497.54 1.010.130.16 1.812.00 2.979.45 58.05 3.00 11.00 71.352.276.50 35.00 63.52 5.235.00 191.740.00 204.61 76.076.877.91 93.116.147.39 98.00 249.00 208.272.00 10.50 3.00 15.00 80.680.877.066.18 90.425.205.525.69 6.700.50 4.67 5.00 248.640.984.00 77.615.402.00 252.463.00 187.00 6.626.75 63.877.508.235.640.00 195.13 4.877.50 20.765.40 101.00 200.410.884.00 81.00 80.00 1.80 943.00 80.550.319.022.01 895. LD + LL + LM .354.142.170.50 43.00 30.00 63.877.013.850.00 6.18 100.12 Penalty RM Cost ($) Cost ($) 5.368.00 205.23 922.008.877.240.00 3.00 56.877.77 819.00 28.00 196.031.540.312.19 5.86 3.452.73 4.600.521.76 63.62 1.355.833.470.764.96 Holding Cost ($) 3.

When the level of uncertainty changes from a low level to a high level. SUPPLY. As can be seen from Figure 8 (the main effect plot of the demand and process uncertainties).571 0. the graph shows that the level of uncertainty of both demand and process has a negative effect to the whole chain‘s profit.20% R-Sq(adj) = 71. the supply uncertainty and all interactions have shown no effect on the whole chain‘s profits. Since. If we look closely at the results from ANOVA. the total profits of the whole chain reduce accordingly. and process uncertainty ANOVA results presented in Figure 7 show that.69% Figure 7: ANOVA of the whole chain‘s profit versus demand.77 0. with 95% confidence level. the demand and process uncertainties have an effect on the total profit of the supply chain. .846 0.04 0.919 R-Sq = 74.000 0. there is no interaction among the main effects. we can see that the process uncertainty (missed quantity) has the highest effect to the chain profit. the profits of the chain are mainly reduced as the change of conditions from the main effects.01 0. 2 Analysis of Variance for Total Profit. 2 1. using Adjusted SS for Tests Source DEMAND SUPPLY PROCESS DEMAND*SUPPLY DEMAND*PROCESS SUPPLY*PROCESS DEMAND*SUPPLY*PROCESS Error Total S = 13029. supply.01 P 0.67 0.32 145.905 0. 2 1. However.21 0.000 0. which are the demand and process uncertainties.21 General Linear Model: Whole chain’s Profit versus DEMAND. PROCESS UNCERTAINTY Factor DEMAND SUPPLY PROCESS Type fixed fixed fixed Levels 2 2 2 Values 1.651 0. followed by the demand uncertainty.2 DF 1 1 1 1 1 1 1 72 79 Seq SS 10299263437 55088762 24746527058 6441125 34932531 2453501 1789216 12222686155 47369181786 Adj SS 10299263437 55088762 24746527058 6441125 34932531 2453501 1789216 12222686155 Adj MS 10299263437 55088762 24746527058 6441125 34932531 2453501 1789216 169759530 F 60.

In fact. the accuracy of a company‘s cost structure plays an important role in obtaining good results. the attention has been focused on the probabilistic modelling of the customer demand side. While this study makes a contribution to the academic literature and provides the potential to positively influence managerial practice. First. inventory inaccuracy caused by supply uncertainty (lead time uncertainty) does not have a significant impact on supply chain performance. and the cost related to inventory inaccuracy.22 Main Effects Plot (fitted means) for Total Profit DEMAND 300000 PROCESS Mean of Total Profit 290000 280000 270000 260000 2 LOW 3 HIGH 2 LOW 3 HIGH Figure 8: Main effect plots of demand and process uncertainties 7. In our study. compared to inaccuracy caused by inaccurate demand forecast and shipment lateness. Inaccuracy caused by the process uncertainty. there are nonetheless limitations that provide opportunities for further research. the uncertainties in the supply side have not received the amount of treatment that they deserve. such as missed quantity and theft. We have studied how demand. Therefore. These results are achieved in a supply chain in which information on customer demand is already exchanged. supply and process uncertainties affect inventory inaccuracy. This can mainly be attributed to the fact that the level of its impact on the supply chain profitability is not as significant. in . it is quite difficult for a company to commit to some numbers in its cost structure since they probably have never been recorded or. and process uncertainties. appears to have the biggest impact on supply chain performance. Conclusion In most supply chain production/inventory models that involve uncertainties in the environment. up until recent years. Our results indicate that eliminating inventory inaccuracy caused by uncertainty can reduce supply chain costs as well as increase profit. The impact of the uncertainty on supply chain performance varies by the factor that causes it. the out-of stock level. and can be managed by setting a higher target stock level in the shop. supply. There are three main causes of uncertainty in the retail supply chain under study– demand.

the retailers are somewhat more sensitive and should be well aware of these unforeseeable uncertainties. As poor inputs lead to poor results. International Journal of Logistics Systems and Management.. Additionally. Recent developments indicate that RFID is going to be. one may also compare the benefits of eliminating the uncertainty with associated cost of process changes or the introduction of new technologies. .23 many instances. We are also grateful to the reviewers for their constructive and helpful comments on an earlier version of this paper. In these case studies. (2011) ‗A computer simulation model for analyzing performance of inventory policy in multi-product mode in two-echelon supply chain‘. pp. and Lendermann P. 8. 1. and in some cases. Buckley. pp. 18-31. and Chandra. without a reliable cost structure. Sensitivity analysis could also be conducted with respect to some cost parameters to check their influence on the results. lead time.. automatic identification technologies such as RFID offer the potential to increase accuracy. Our current results suggest that it can be useful for companies that face a high level of inventory inaccuracy to examine procedures or technologies to eliminate them. Some researchers advocate the use of benchmarking. and incorrect delivery variability) and default values for the factors that cause inventory inaccuracy. A larger saving comes from the retailers than the manufacturer since most of the members in the retail supply chain are retailers.g. Also various structures of supply chains are needed to further investigate in order to understand the circumstances under which it is worthwhile to address the problem of inventory inaccuracy. References Azadeh. Moreover. 1652-1658. IIE Transactions. awareness building. J. adopted in a number of retail supply chains to replace the old bar code systems. pp. only the process uncertainty can affect the manufacturer‘s profit. managers are hesitant to estimate them. M. 26. No. and process improvements. As a result. Proceedings of the 2002 Winter Simulation Conference. there are different approaches that can help to improve inventory accuracy. S. P. 5. With the current setting. for demand. Allahverdiloo. An extension to cover a wider range of the above-mentioned factors could possibly lead to other in-depth results. and Shirkouhi. R. the results of our model indicate that an elimination of inventory inaccuracy can increase the chain profit up to 30%. S. Jain. the manufacture does not show to be affected much by the uncertainty. However. A. To give some guidelines. case studies based on real data should be conducted to study the impact of these uncertainties in relation to total supply chain costs.66-85. In fact. has been. (1994) ‗Variability in assembly and competing systems: effect on performance and recovery‘. Vol. the obtained results could be misleading and could lead to misinterpretation. Bhatnagar. S. Our study is limited to a oneproduct supply chain configuration with specific parameter estimates (e. Banks.. Acknowledgements This work was supported by the National Research University Project of Thailand Office of Higher Education Commission. In practice.. Vol. No. (2002) ‗Panel session: opportunities for simulation in supply chain management‘. the cost structure varies from one company (industry) to the other.

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