Analysis of Inventory Models

with Limited Demand

I f
Information

ti

David Simchi-Levi
 Sources

z The Bullwhip Effect

)Drezner, Ryan, Simchi-Levi, “Quantifying the
Bullwhip Effect: The Impact of Forecasting, Lead
Times and Information
Information.”
)Chen, Ryan, Simchi-Levi, “The Impact of
Exponential Smoothing Forecasts on the Bullwhip
Effect.”
z Minimax Inventory Models
)Gallego, Ryan, Simchi-Levi, “Minimax Analysis for
Finite Horizon Inventory Models
Models.”
 Quantifying the
B ll hi Effect
Bullwhip Eff t

z The Impact of Forecasting Methods

)Moving Average
)Exponential
Exponential Smoothing
z Multi-Stage Supply Chains
)Centralized Information
)Decentralized Information
 A Si
Simple
l Supply
S l Ch
Chain
i

z Single retailer, single manufacturer.

)Retailer observes customer demand, Dt.
)Retailer
Retailer orders qt from manufacturer.
)Lead time + 1 = L.

Dt qt
Retailer Manufacturer
L
 A Simple Supply Chain:
O d off Event
Order E ts

z At end of period t:
)Retailer updates forecast based on Dt.
)Calculates
Calculates order
order-up-to
up to point, yt+1.
)Places order qt+1.
)O d arrives
)Order i t t off period
att start i d t+L.
t+L
)Demand is observed and filled.
)Unfilled demand is backlogged.
 A Simple Supply Chain:
I
Inventory
t Policy

li

z Retailer follows order-up-to policy based

on inventory position.
)Approximates
Approximates the optimal policy under
the assumption of normal demand.
)A policy used frequently in practice
practice.

y t = L μ$ t + z LS t
 A Simple Supply Chain:

M i A
Moving Average Forecast

z Mean and standard deviation of

demand are estimated using a
moving
g avera ge of p observations:

p p
∑ Dt−i ∑ ( Dt−i − μ$ t )
2

$μ t = i=1 St = i=1

p p −1
Moving Average Forecasting:

Od Q
Order Quantity

tit

z Excess demand is returned at no cost.

z The order quantity for period t is:

qt = yt − yt−1 + Dt−1

⎛ L⎞ ⎛ L ⎞

⎞
= ⎜ 1+ ⎟ Dt−1 − ⎜ ⎟ Dt− p−1 + z L( S t − S t−1 )
⎝ p⎠ ⎝ p⎠
Moving Average Forecasting:
Th V
The Variability
i bilit off Orders

Od

z Determine the variance of q relative to

the variance of demand, σ2:

⎛ 2L 2L ⎞ 22
Var( qt ) = ⎜ 1+ + 2 ⎟ σ + z LVar( St − St −1 )
2

⎝ p p ⎠
⎛ 2L⎞
+2z L⎜ 1+ ⎟ Cov( Dt−1 ,St ).
⎝ p⎠
Moving Average Forecasting:

Symmettriic Demand
d

Lemma: Let Di, i=1,...,p, be i.i.d. observations

from a symmetric distrib
bution withh variance σ2.
Then
Cov(Di,S)=0.

Corollary: The increase in variability from the

retailer to the manufacturer is:
Var (qt ) 2L 2L 2
≥1+ + 2 .
σ 2
p p
Moving Average Forecasting:
N
NormallD
Demand d

Lemma: Let Di, i=1,...,p, be i.i.d. observations

from a normall distrib
d h variance σ2.
bution with
Var ( S t − S t −1 )
≥ 1 .
σ 2 2
p

Corollary: The increase in variability from the

retailer to the manufacturer is:

is:
Var (qt
) 2L 2L2 + z 2 L
≥1+ + .
σ2 p p 2

 Var(q)/σ :
2

L B d vs. Si
Lower Bound l ti
Simulation
3

25
2.5

1.5

0.5

0
0 10 20 30 40
p
Bound Simulation
 Var(q)/σ :
2

F V i
For Various L d Ti
Lead Times

14
L=5
12

10

8 L=3
6

4 L=1
L=1
2

0
0 5 10 15 20 25 30
 The Bullwhip Effect:

Manageriiall Insi
I ights

ht

z Exists, in part, due to the retailer’s need to

estimate the mean and variance of demand
demand.
z The increase in variability is an increasing
function of the lead time and the smoothing
parameter.
)With
With longer lead time need more demand
data to reduce the bullwhip effect.
 M lti Stage Supplly Chai
Multi-St Ch ins

Consider an N stage supply chain:

)Stage i places order qi to stage i+1.
)L
Li is lead time between stage i and ii+1.
1.

qo=D Retailer q1 Manufacturer q2 Supplier

Stage 1 L1 Stage 2 Stage 3

L2
 Multi-Stage Supply Chain:

C t lized
Centrali d IInfformation

ti
At the end of period t-1, stage i:
)Receives order qii-11
t.
)Receives updated forecast from retailer.

)Calculates the order-up-to point, yit.

)Orders qit.

 Multi-Stage Supply Chains:

C t lized
Centrali d IInfformation

ti

Each stage in the supply chain uses:

)The estimate of lead time demand
received from the retailer.
)An order-up-to inventory policy:
y = Li μ$ t
i
t
where μ$ t is received from the retailer.
 Multi-Stage Supply Chains:

C t lized
Centrali d IInfformation

ti
Lemma: When the retailer uses a moving average

with p observations,
observations the increase in variability at
at

stage k is:

2
⎡∑ L ⎤ 2 ⎡∑ L ⎤
k k

Var ( q )
k 2
⎢⎣i=1 i ⎥⎦ ⎢⎣i=1 i ⎥⎦
=1+ +
σ 2
p p

 Multi-Stage Supply Chains:

D
Decentralized
t li d IInformation

f ti
z The retailer does not provide upstream

stages with customer demand data

data.

)Stage i estimates the mean demand from the

-1, qti-1, i > 1

orders it receives from stage ii-1 1.

p −1
i
−1
∑q t −
j
j =
0
μ

$ =

i
t
i

=
Li
μ$ i
t
p

 Multi-Stage Supply Chains:

D
Decentralized
t li d IInformation

f ti

Lemma: When the retailer uses a moving average

with
i h p observations,
b i the
h increase
i in
i variability
i bili
at
stage k is:

Var ( q k
) ≥ ∏ ⎡1 + 2 L
k 2 Li ⎤
2

⎢
i
+ 2 ⎥
σ 2
i=1 ⎣ p p ⎦
 The Bullwhip Effect:

Manageriiall Insi
I ights

ht
z Exists, in part, due to the retailer’s need to estimate
the mean and variance of demand
demand.
z The increase in variability is an increasing function of
the lead time and the smoothing g parameter.
)With longer lead time need more demand data
to reduce the bullwhip effect.
z The more complicated the demand models and the
forecasting techniques, the greater the increase.
z Centralized demand information can reduce the
bullwhip effect, but will not eliminate it.
MIT OpenCourseWare
http://ocw.mit.edu

ESD.273J / 1.270J Logistics and Supply Chain Management

Fall 2009

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