International Journal of Production Research

Vol. 50, No. 9, 1 May 2012, 2380–2395

A decomposition approach for the performance analysis of a serial multi-echelon supply chain
Stefano Saettaa*, Leonardo Paolinia, Lorenzo Tiaccia and Tayfur Altiokb
a
Department of Industrial Engineering, University of Perugia, Perugia, Italy; bDepartment of Industrial and Systems
Engineering, Rutgers University, Piscataway, NJ, USA
(Final version received April 2011)

Over the last decade, supply chain coordination has attracted much attention in the context of industrial
logistics systems, because of the role played in production support logistics. There is a growing interest in the
analysis and measurement of performances, because performance analysis allows us to build supporting
decision tools for the design, planning and management of the supply chain. This paper presents an analytical
approach for performance analysis based on a decomposition principle. The approach is applied to a serial
supply chain that consists of two levels of suppliers, a production plant and a distribution centre, and operates
as a pull system. This configuration is typical for bulk materials such as grain. The method allows us to
approximately calculate performance indicators (such as customer satisfaction and inventory levels) taking
into account all the interactions between the different echelons of the supply chain. The accuracy of the
approximations is confirmed by the results obtained via a simulation model. Numerical analysis allows us to
outline interesting and non-intuitive behaviour of the performance indicators for different stages of the supply
chain.
Keywords: multi-echelon systems; supply chain coordination; performance analysis; decomposition method;
Markovian analysis

1. Introduction
Industrial logistics is concerned with the physical inflow and outflow of goods and associated services that link the
firm to the external world before and after production takes place (Barros 1997). A relevant part of industrial
logistics systems is therefore represented by production support logistics, which includes supply chain, distribution,
warehouse location and inventory management issues (Barros 2001). In particular, supply chain management is
considered to be the most popular operation strategy for improving organisational competitiveness in the twenty-
first century (Gunasekaran and Cheng 2008).
Supply chains can be considered as a network of independent and autonomous entities that work in unison
towards some common objective. But since each node of the supply chain is an autonomous member, each node
takes decisions in accordance with what it perceives is best for it. In the past, suppliers, retailers, plants as well as
distribution centres used to manage their operations independently of each other, leading to frequent stock-outs and
poor supply chain performance. The development of new information technology tools that provide high-
performance data sharing and outsourcing to emerging nations with lower labour costs places significant emphasis
on the coordination of the entire supply chain. Successful case studies regarding production/distribution scenarios
with a high level of coordination among business partners have clearly shown the competitive advantages
achievable. One of the most significant paradigm shifts of modern business management is that businesses no longer
compete individually or as autonomous entities, but rather as parts of supply chain networks (Douglas and Cooper
2000). There are numerous examples in the literature that demonstrate that this autonomous decision-making by
each node leads to overall poor performance of the supply chain (Wadhwa et al. 2009). For example, it was
recognised that good buyer–vendor coordination is essential for establishing efficient logistics processes
(Chiu and Huang 2003).
For this reason, multi-echelon supply chain models have been studied in the literature, and in particular
many methods of performance analysis and evaluation have been developed in order to provide supporting decision
tools both for the design and for the planning phase. Furthermore, performance measures and metrics are

*Corresponding author. Email: stefano.saetta@unipg.it

ISSN 0020–7543 print/ISSN 1366–588X online

ß 2012 Taylor & Francis
http://dx.doi.org/10.1080/00207543.2011.581002
http://www.tandfonline.com
 International Journal of Production Research 2381

essential for effectively managing logistics operations, particularly in a competitive global economy
(Gunasekaran and Kobu 2007).
Analytical methods are quite useful for modelling supply chains for performance analysis. Queueing-
theory-based algorithms serve especially well for this purpose. This is because there is always a queuing
representation for an inventory system with products waiting for customers or, vice versa, customers waiting for
products. This representation helps to analyse logistics systems and hence support the decision-making process.
Also, simulation techniques may generally be used to analyse the performance of a system, but to identify an
optimal configuration for a logistics chain, many different system variants have to be evaluated. Simulation-based
evaluation is usually very time-consuming. Analytical evaluation methods are therefore needed to determine the key
performance measures quickly, even if these methods only approximate the true performance of the logistics chain
(Wu and Dong 2008).
In this paper, we develope an analytical method to model a serial multi-echelon supply chain that consists of two
levels of suppliers, a production plant and a distribution centre, and operates as a pull system. This configuration is
typical of bulk material supply chains such as that of grain. The method is based on a decomposition approach, and
allows us to approximately calculate performance indicators taking into account all the interactions between the
different echelons of the supply chain.
As many authors have already highlighted (see, for example, Gebennini et al. (2009)), full optimisation of the
supply chain is achieved by integrating strategic, tactical and operational decision-making in terms of the design,
management and control of activities. In this paper, we try to take into consideration this point of view by
considering metrics that are usually adopted at the operational level (such as inventory levels and number of
backorders) in the design phase of the whole supply chain, which is a typical strategic issue.
The paper is organised as follows. Section 2 introduces a literature review on multi-echelon production/
inventory models. Section 3 describes the production and distribution scenario of our investigation. Section 4
presents details of the decomposition approach applied. Section 5 presents a numerical experiment and the model is
validated by a comparison of results obtained via simulation. The results are also discussed and some managerial
insights are drawn. Section 6 provides the conclusions and suggestions for further development. Technical details for
a specific scenario are shown in Appendix A.

2. Literature review
There are many recent studies concerning supply chain models (De Sensi et al. 2008, Bruzzone and Longo 2009, Buil
et al. 2010, Wadhwa et al. 2010). Many studies are based on simulation modelling, which is an effective way to test
policies and operational rules. Multi-echelon inventory systems were studied by Hanssmann (1959) and modelled as
a system in series where each facility applies a base-stock policy, and where stock-out delays are calculated
approximately. Early work on multi-echelon inventory research is generally attributed to Clark and Scarf (1960),
who studied an N-echelon system operating under periodic-review ordering policies. They introduced the concept of
the echelon stock in order to prove that the optimal control policies for the N-echelon system in series with
discounted penalty and holding costs are characterised by N so-called echelon order-up-to levels. Eppen and
Scharage (1981) analysed a divergent two-echelon system in which a central depot supplies multiple end stock
points. Some restrictive assumptions are made in controlling inventory, penalty costs, demand rate and lead time
distribution. Federguen and Zipkin (1984) extended the model of Hanssmann (1959), reducing some of the
restrictive assumptions mentioned above. Badinelli (1992) proposed a model for the steady-state probabilities of on-
hand inventory and backorders for each facility of the inventory system in which each facility follows a (Q, R) policy
based on installation stock. More recently, Chen and Zheng (1994) investigated echelon stock (R, nQ) policies in
production/inventory systems in series with stochastic demand. Under an echelon stock (R, Q) policy, each stage
replenishes its stock according to a stage-specific echelon stock (R, nQ) policy. That is, an order of nQ units is placed
when its echelon stock falls to or below its reorder point R, where Q is the stage’s base order quantity and n is a
minimum integer with y þ nQ 4 R. Note that (R, nQ) policies are widely used reorder-point, order-quantity policies
in practice. For continuous-review systems where each customer demands a single unit, (R, nQ) policies are reduced
to the more well-known special case of (R, Q). They provide a recursive approach to calculate the steady-state
average echelon inventory levels. The procedure is based upon the observation of the relationship between the
inventory state of adjacent stages in the system. Chen and Zheng (1998) investigate a similar scenario with
compound Poisson demand, and provide a simple method for determining near-optimal control parameters.
2382 S. Saetta et al.

Another well-investigated scenario in this field are multi-level distribution/inventory and production/inventory
systems. Axsäter (2003) considers a two-echelon distribution/inventory system operating under a continuous-review
installation stock (R, Q) policy with a central warehouse and a number of retailers who face stochastic demand. It
introduces a technique based on a normal approximation for both the retailer and warehouse demand. Other studies
such as those of Svornos and Zipkin (1988) and Axsäter (1998) provide varying solution methodologies for similar
scenarios. Regarding the production/distribution scenario, multi-level pull systems represent a challenging issue. Di
Mascolo et al. (1996) propose an analytical method for the performance evaluation of a multi-stage kanban system.
They consider a single-product production system decomposed into stages in series. Each stage consists of a
manufacturing cell and an output buffer. Altiok and Ranjan (1995) analyse a multi-stage, pull-type production/
inventory scenario with Poisson demands and phase-type processing times. They propose a decomposition method
in order to evaluate system performance. Gurgur and Altiok (2004) extend the approach to a decentralised pull-type
manufacturing system in which each stage has its own input and output stock-keeping activity. This study combines
the behaviour of both pull and push systems, utilising a two-kanban representation. An approximate analysis of a
supply chain is considered by Karaman and Altiok (2009). Approximation makes it feasible to arrive at optimal
batching policies.
Our work is an extension of the studies mentioned above in which a multi-level production/distribution/
inventory system operates as a pull system. We have developed an efficient solution technique to evaluate the
performance of the system of interest.

3. Problem definition
In this paper, we investigate a logistic system consisting of several stages and representing a simplified version of a
typical bulk material supply chain, such as, for example, a grain supply system. A typical grain supply chain, as
many others in the food industry, consists of levels such as farming, collecting, manufacturing/processing, retailing
and catering as well as consumer handling (East Anglia Food Link 2004). Basically, for this type of supply chain we
can assume the farming operation as having an infinite source of supply of raw materials, the manufacturing stage as
having a series of processes and the retailing and catering level being represented by a final product distribution
system that directly faces customer demand. Our assumption of an infinite source for the farming level arises from
the consideration that farming is a complex procedure that requires several months and operations and is
characterised by seasonality, in which feed is planted in the winter and wheat becomes available for cropping in the
summer. Yet, due to increasing international trade, large wheat shipments are carried all over the world. That is,
wheat stocks from different sources are always available for major collection and storage facilities.
The proposed model is shown in Figure 1. It consists of a supplier, a raw material warehouse (SILO), a
production facility (PLANT), and a final product warehouse, called the distribution centre (DC). At the PLANT
there are two different warehouses. The first, called Buffer In, stores raw material units (e.g., standard wheat bags)
coming from the SILO, and the second, Buffer Out, where products are stored after processing (e.g., standard flour
bags arriving from the mill manufacturing process). The PLANT starts to process raw material units one by one
each time production resumes. The DC directly faces customer demand, which is assumed to be Poisson with rate .
The production/distribution scenario works similarly to a pull system, that is the goal of the chain is to produce/
provide units/items as soon as they are needed, rather than producing as much as possible. Figure 1 shows the
topology and inventory review policies in each echelon of the system; dotted lines and bold arrows represent
information and physical flows, respectively.
Customers arrive at the DC and each customer demands a single unit of the product. The DC works with a
continuous-review control policy (RD, QD) with installation stock. An order is placed to Buffer Out every time the

( RS , QS ) ( RM , QM ) ( R, r ) ( RD , QD )

SILO Buffer Buffer λ

Supplier Mill DC
In Out
ΤΤ S , S ΤΤS , I TTO , D Customer
Demand
PLANT

Figure 1. The multi-echelon production/distribution scenario investigated.

 International Journal of Production Research 2383

inventory position (stock on hand, plus outstanding orders minus backorders) drops to RD. A batch of size QD is
delivered from Buffer Out with a certain delay TTO,D due to transportation activity. Additional delay is expected
every time there is insufficient inventory in Buffer Out to complete the requested batch. If customers do not find
units in the DC inventory, missing units are backordered and recovered as soon as the replacements arrive,
following a FIFO policy.
The Buffer Out uses a continuous-review (R, r) policy, that is as soon as the inventory level in Buffer Out drops
to r (the reorder point), the PLANT resumes production processing a unit of raw material from the Buffer In. The
PLANT stops manufacturing when the inventory level in Buffer Out reaches the target level R. The unsatisfied
demand is also backordered in Buffer Out.
The Buffer In works with a continuous-review control (RM, QM) policy with installation stock. The inventory
level decreases one by one as soon as manufacturing starts, and increases in batches equal to QM. A replenishment
order arrives every time the inventory position at Buffer In drops below the reorder level RM, with a certain delay
TTS,I due to transportation activity. Clearly, more delay is expected when there are no units available at the SILO
inventory.
The SILO uses a continuous-review (RS, QS) inventory control policy with installation stock and a backordering
policy for unsatisfied demand. A replenishment order is placed when the SILO inventory position drops below the
reorder level RS, with a batch size of QS, and it arrives after a delay of TTS,S due to transportation operations. We
assume that all the units are processed sequentially in the transportation system, so replenishment orders do not
cross each other over time, and they are received in the same order they are placed. Also, we consider that all
transportation times are exponentially distributed for tractability purposes; the production time at the plant is
assumed to come from a mixture of generalised Erlang distributions (MGE-2).
Performance analysis of the system described above is quite difficult and the underlying stochastic processes are
highly involved. Clearly, there are two types of approaches: simulation and analytical modelling. An analytical
approach allows a better understanding of the physical structure and system behaviour. However, it is not possible
to develop an exact analytical methodology due to dimensionality issues. Therefore, approximations seem to be the
only practical analytical approach.

4. An approximate approach
Markovian approaches for the performance evaluation of a production scenario have been widely adopted.
Unfortunately, this methodology is not feasible for the system introduced since keeping track of all the distribution
states is not practicable. The state space is very large and is not feasible to deal with computationally, thus making
the exact approach unsuitable. Instead, we propose an approximate methodology to reduce the complexity of the
solution approach. We decompose the original system into smaller subsystems and analyse them separately. The
subsystems are reconnected and the operational behaviour of the original system is recreated. Each subsystem has its
own stock control policy and is characterised by a different demand inter-arrival and procurement time, making it
possible to analyse them in isolation.
The main principle of decomposition is that the inventory level in subsystem j influences the procurement time in
subsystem j þ 1 and the demand inter-arrival time in subsystem j  1. For instance, a low inventory level in j leads to
a longer procurement time in j þ 1, and a shorter demand inter-arrival time in j  1; a high inventory level in j leads
to a shorter procurement time in j þ 1, and a longer inter-arrival time in j  1.
In the approximation approach, the system is decomposed into a number of subsystems as described below
(based on Altiok and Ranajan (1995), Altiok (1997) and Gurgur and Altiok (2004)).
. Subsystem (1) involves the SILO, with the (RS, QS) continuous-review policy and it faces demand from
the plant and replenishments from the supplier.
. Subsystem (2) involves Buffer In, with the (RM, QM) continuous-review policy and it faces demand from
the mill and replenishments from SILO.
. Subsystem (3) involves Buffer Out, with the (R, r) continuous-review policy and it faces demand from the
DC and replenishments from the mill.
. Subsystem (4) involves the DC, with the (RD, QD) continuous-review policy and it faces customer demand
and replenishments from Buffer Out.
2384 S. Saetta et al.

Following the assumptions introduced above, the decomposition of the supply chain is presented in Figure 2 and
will be investigated in the following sections. Let us define the following:
 customer demand rate
TTS,S transportation time between Supplier  SILO
TTS,I transportation time between SILO  PLANT
TTO,D transportation time between PLANT  Distribution Centre
XM manufacturing time at the mill
Mi0 node modelling procurement inventory at Buffer i
M00i node modelling demand arrival process at Buffer i
Ui0 processing time at Mi0
U00i processing time at M00i
Ni inventory level at Buffer i
Ds probability of no unit in Buffer In
Dc probability of no unit in SILO
M probability that only one space is available in Buffer Out
oðiÞ throughput of subsystem ðiÞ

As shown in Figure 2, in each subsystem the downstream node models the demand inter-arrival time and the
upstream node models the procurement time. Therefore, the subsystems are inter-connected in such a way that they
use information from one another. In the following sections, an analytical model is provided for each subsystem. We
later introduce a direct approach to connect these subsystems. Earlier approaches to similar decomposition
modelling proposed an iterative procedure where each subsystem is analysed using new information at each
iteration. A relevant contribution of this paper, in addition to its particular application to the above supply chain
typology, is to propose a direct approach to analyse all the subsystems at once.

4.1 Analysis of procurement times

In this section, the procurement time is analysed for each subsystem. Starting from subsystem (1), it can be seen
that, as soon as the SILO places an order, raw material units are collected and sent to the SILO. It is assumed that
the supplier has enough capacity to provide the material demanded by the SILO. The effective procurement time is
only the transportation time between the Supplier and the SILO, which is assumed to be exponentially distributed
for tractability purposes. Thus, we have
U10 ¼ TTS,S : ð1Þ
For subsystem (2), the procurement time analysis is a little more involved. It can be seen that, if the batch size of
Buffer In QM is smaller than the on-hand inventory at the SILO, the effective procurement time is just the
transportation time TTS,I; whenever standard units are missing in the SILO stock, an additional delay is expected.
The expected additional delay is strictly related to SILO’s procurement; therefore, we have

0 TTS,I , with probability 1  Dc,
U2 ¼ ð2Þ
TTS,I þ 1  U10 , with probability Dc,

where
 
QM
1 ¼ :
Qs

Subsystem (3) has a similar representation for the procurement time. Until there are units in the Buffer In
inventory, the procurement time is equivalent to the plant processing time. On the other hand, when there are
 International Journal of Production Research 2385

Figure 2. Decomposition of the original supply chain.

no available units, the procurement time is longer, due to the time spent in replenishing Buffer In. That is,
we have

XM , with probability 1  Ds,
U30 ¼ ð3Þ
XM þ U20 , with probability Ds:
In contrast to subsystem (2), there is no need to be concerned about the batch size because the production picks up
items one by one. In subsystem (4), the effective procurement time representation needs more modelling than the
other cases. Replenishment at Buffer Out occurs one by one, but the DC reorder policy is in batches; thus, it is
possible to have cases in which one or more standard bags are missed to satisfy the DC replenishment orders. The
number of missed units can vary in the range from zero, when the Buffer Out stock is greater than the DC batch, to
QD, when the on-hand stock is zero. Therefore, !ð0Þ indicates the probability that there are no units missed in the
Buffer Out stock, and !ðiÞ, i ¼ 1, . . . , QD , the probability that i units are missing in the Buffer Out inventory; hence,
the following equation represents the DC’s effective procurement time:
8
< TTO,D , with probability !ð0Þ,
0
U4 ¼ TT Pi
ð4Þ
: O,D þ j  U30 , with probability !ðiÞ, i ¼ 1, . . . , QD :
j¼1

The description of the procurement time represents the first step in evaluating the subsystems. In the following
section, we present the modelling of the demand inter-arrival time process for each system.
2386 S. Saetta et al.

4.2 Modelling demand arrival processes

For practical reasons, the demand inter-arrival time analysis starts from the last subsystem. In subsystem (4), the
DC deals directly with customer demand, which is assumed to be Poisson distributed with rate ; thus, it also
represents the demand arrival process at subsystem (4). In this arrival process, we assume that the customer inter-
arrival times are exponentially distributed with rate  and each customer demands a unit of the product.
Subsystem (3) receives orders of size QD from the DC. Due to the continuous-review (RD, QD) policy, and the
Poisson-distributed customer demand, the DC places orders every time QD customers arrive. Keeping in mind that
unsatisfied demand is assumed to be backordered, Buffer Out receives orders every time QD customers visit the
system; that is, the effective inter-arrival time follows an Erlang distribution with KD ¼ QD phases each with a phase
rate of .
In subsystem (2), the demand inter-arrival time is more complicated than for the other subsystems, and it is
directly influenced by the manufacturing stage. It can be seen that the production plant picks up units from Buffer
In one by one, every time manufacturing is resumed. Following the continuous-review (R, r) policy, the plant starts
processing when the Buffer Out inventory drops to the reorder level r. From that time, until the Buffer Out
inventory level returns to the target level R, a single unit demand arrives at Buffer In. That portion of demand could
be represented by a single phase with a mean time equal to the manufacturing mean time. As soon as the Buffer Out
inventory reaches the target level R, the inter-arrival time process goes into a blocking mode. Blocking has to reflect
the fact that manufacturing will not be resumed until the Buffer Out inventory level returns to the reorder level r.
Thus, the length of the blocking period has to be strictly related to the difference between the parameters R and r; in
more detail, the demand inter-arrival time will reflect the blocking duration during which (R  r) customers visit the
system. The effective demand inter-arrival time for subsystem (2) follows a generalised Erlang distribution with the
first phase rate equal to 1/XM, and KM blocking phases, where KM ¼ (R  r)/KD. We have

XM , with probability 1  M ,
U002 ¼ ð5Þ
XM þ KM  U003 , with probability M :
 
Note that E U002 ¼ XM þ M  KM  ð1=Þ.
At subsystem (1), batch replenishment orders arrive from Buffer In every time the plant manufactures QM
units; that is, due to the backordering policy, the
 structure of the demand inter-arrival
  time follows an Erlang
distribution with KS ¼ QM phases, mean time E U001  ¼ KS  U002 , and phase rate 1=E U002 .

4.3 Systems solving and aggregation

As described above, each subsystem is modelled, within the two-node decomposition, with a phase-type
representation for procurement and demand inter-arrival time. It should be noted that phase-type random variables
give rise to a Markovian analysis (Neuts 1981) that can be implemented using a convenient equation-solving
technique. Appendix A gives a possible solution method that can be applied to subsystem 4. The analysis of the
underlying Markovian process introduced for each subsystem allows us to evaluate all performance measures of
interest such as the average inventory levels, backorder levels and customer service levels. Analysis of the subsystems
involves calculating the probability parameters DC , DS , M , which are unknown and that lead to the replication of
the behaviour of the original system. In order to obtain these parameters, Altiok and Ranjan (1995) proposed an
algorithmic approach in which these probabilities are calculated iteratively, evaluating the subsystems and updating
the unknown values at each iteration. This procedure provides accurate results without requiring extensive
calculational effort. Yet, this approach may occasionally run into convergence issues. Below, a direct solution
approach is proposed that does not experience convergence issues. This is where the major contribution of our
approach lies.
The proposed new procedure works in four main steps.
(1) Evaluate M (evaluation of subsystem ð1Þ)
(2) Evaluate DC (evaluation of subsystem ð2Þ)
(3) Evaluate DS (evaluation of subsystem ð3Þ)
(4) Evaluate !ðiÞ for i ¼ 0, . . . , KD (evaluation of subsystem ð4Þ)
 International Journal of Production Research 2387

Due to the backordering practice and the behaviour of the pull system, the throughput of the supply chain
directly reflects the characteristics of customer demand; that is, indicating the throughput of the supply
chain by oSC :

oSC ¼  ðcustomer demand rateÞ: ð6Þ

In order to maintain flow conservation among all subsystems, the following relationship holds among the
throughputs of all the subsystems:

oSC ¼ oð1Þ ¼ oð2Þ ¼ oð3Þ ¼ oð4Þ ¼ : ð6 Þ

We can now perform the first step of the procedure. From Amin and Altiok (1997) we have

utilization of M00i
oðiÞ ¼   , ð7Þ
E U00i
where E½U00i  is the mean processing time at M00i . Applying Equation (7) to ð2Þ, we have

1
o ð2Þ ¼ : ð8Þ
½XM þ M  KM  ð1=Þ
M is the only unknown in Equation (8), so the first unknown parameter can be evaluated using

½ð1=Þ  XM 
M ¼ : ð9Þ
ðKM  U003 Þ
It can be seen that the blocking probability at M002 depends on the difference between the mean arrival time of the
customer demand and the production time, mediated on the length of time needed to resume manufacturing. That
is, Equation (9) gives the rate and the mean time of the phases in M001 ; in ð1Þ there are no more unknowns and the
subsystem can be solved. Appendix A gives a complete description of the solution technique adopted in subsystem
ð4Þ; for a better understanding, refer to Appendix A. The evaluation of the state probability distribution for ð1Þ
now leads to process step number 2. From Altiok (1997), we have

P1 ð0Þ
DC ¼ , ð10Þ
o ð1Þ  E½U10 
where P1(0) is the probability that no units are available in the (1) inventory level, o ð1Þ is the throughput of
subsystem (1) and E½U10  is the mean processing time of M10 . Evaluating DC , no more unknowns are present in (2),
so the steady-state probability distribution of (2) can now be obtained. As with step 2, step 3 can be viewed in the
same way. That is, we have

P2 ð0Þ
DS ¼ : ð11Þ
o ð2Þ  E½U20 
The steady-state probability distribution of (3) leads to step 4. Keeping in mind that !(i), i ¼ 0, . . . , KD, represents
the probability that i units are missed, in order to complete the batch replenishment order arriving at Buffer Out, we
have

!ð0Þ ¼ PrðNOUT  QD Þ,
!ðiÞ ¼ PrðQD  NOUT ¼ iÞ, i ¼ 1, . . . , QD ,
ð12Þ
X
QD
with !ðiÞ ¼ 1,
i

where NOUT is the number of items available in the Buffer Out inventory level.
At the end of step 4, all subsystems are analysed and evaluated, and they correctly replicate the operational
behaviour of the original scenario. The next section compares the effectiveness of this approximate procedure with
respect to simulation.
2388 S. Saetta et al.
Table 1. System transportation and capacity parameters.

Transportation value

Buffer Out–DC 7 hours Supplier–SILO 20 hours

SILO–Buffer In 14 hours Mill processing 4.5 hours
Warehouse capacity test 1 Warehouse capacity test 2

DC QD ¼ 5 RD ¼ 5 DC QD ¼ 4 RD ¼ 6
Buffer Out R ¼ 12 r¼7 Buffer Out R ¼ 12 r¼8
Buffer In QM ¼ 12 RM ¼ 8 Buffer In QM ¼ 10 RM ¼ 10
SILO QS ¼ 36 RS ¼ 4 SILO QS ¼ 30 RS ¼ 10

5. Numerical results
In order to analyse the procedure described above the results from the decomposition procedure are compared with
their counterparts from a simulation model. The simulation model was built using the ARENATM software tool
from Rockwell Software, and ran for 20,000,000 job departures. The approximate approach was validated by
comparing the performance measurements, including Average Inventory, Backorder Level and Customer
Satisfaction for all levels of the supply chain.
It is assumed that the system works 24 hours a day, 365 days a year. The simulation model was run for various
levels of customer demand rates and batch sizes, and two different tests were performed. Key parameter values are
summarised in Table 1.
Tables 2, 3 and 4 present the results of TEST 1. Average inventory levels are presented in Table 2. For every
subsystem, the first column gives the simulation (Sim.) value, the second the analytic (An.) value and the last column
shows the relative error. Table 3 analyses the backorder level using the same formalism and, similarly, Table 4
presents the customer service levels.
Figure 3 presents the steady-state probability distribution of the inventory levels at each warehouse for the case
 ¼ 4. For all inventory levels, the analytic values are compared with their simulation counterparts.
Tables 5, 6 and 7 present the outcomes of TEST 2. Table 5 presents the average inventory level and Tables 6
and 7 the backorder levels and the customer service levels, respectively. The same format is used in each of the
tables.
The relative error for the average inventory level (Tables 2 and 5) is acceptable in both tests; it becomes
noteworthy only when the customer arrival rate becomes critical. In fact, at  ¼ 4.5 it is very close to the production
rate, and the queues modelled in the system are no longer stable. Even in that case, the higher relative error does not
exceed 9%.
The backorder level results shown in Tables 3 and 6 appear less accurate than the other performance indicators.
In this case, small probabilities are being compared where even small absolute differences lead to large relative
differences. The Customer Satisfaction analysis (Fill rate) from Tables 4 and 6 shows that the results of the
analytical and the simulation models are almost identical; the relative error, even in the worst case, does not exceed
1%. The goodness of the decomposition approach can be seen in Figure 3. From a graph of the steady-state
probability distributions for both tests, it can be seen that the functions follow each other, and the gap is usually not
easily identifiable. We comfortably state that the approximation approach works well and it accurately replicates the
behaviour of the original supply chain.
Analysing the results, some interesting managerial insights can be drawn. As expected, the backorder
level increases in all subsystems as  increases, and this brings lower values of customer satisfaction. In particular,
high backorder levels and very low customer satisfaction can be observed for increasing values of  at (3),
the Buffer Out. For example, for  ¼ 4.5, customer satisfaction at (3) is around 83%, meaning that around 17% of
orders coming from (4) are backlogged. One could envisage that a low customer satisfaction at (3) should have
a direct negative impact on customer satisfaction of the succeeding subsystem (4). However, customer satisfaction
at (4) is much higher at 98.95%. This is a very interesting and non-intuitive result and can be explained by
the different demand processes faced by (3) and (4) and the different replenishment policies adopted by
the two stages.
 International Journal of Production Research 2389
Table 2. Test 1, average inventory level (average number of items in stock).

(1) (2) (3) (4)

 Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 26.34 26.34 0.02 13.33 13.32 0.09 10.81 10.79 0.16 7.41 7.41 0.00
2.5 25.93 25.92 0.03 13.03 13.04 0.07 10.46 10.41 0.23 7.26 7.26 0.00
3 25.5 25.51 0.02 12.76 12.73 0.10 9.92 9.87 0.48 7.11 7.11 0.03
3.5 25.10 25.10 0.03 12.46 12.44 0.06 9.20 9.12 0.92 6.95 6.94 0.20
4 24.71 24.70 0.01 12.15 12.16 0.09 8.07 7.93 1.76 6.79 6.70 1.30
4.5 24.30 24.30 0.00 11.85 11.87 0.21 6.15 5.91 3.86 6.61 6.05 8.54

Table 3. Test 1. Backorder level (percentage of backordered orders).

(1) (3) (4)

 Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 0.140 0.133 5.00 0.003 0.001 66.67 0.047 0.018 61.70

2.5 0.421 0.424 0.71 0.047 0.009 80.85 0.133 0.064 51.88
3 0.900 1.006 11.78 0.241 0.341 41.5 0.378 0.175 53.70
3.5 2.000 1.972 1.40 2.827 3.904 38.1 0.804 0.410 49.00
4 3.323 3.394 2.18 8.738 7.786 10.89 1.437 0.976 32.08
4.5 5.329 5.349 0.37 22.31 27.34 22.54 2.544 5.907 132.19

Table 4. Test 1. Customer satisfaction (percentage orders on time).

(1) (3) (4)

 Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 99.98 99.99 0.02 100.00 99.99 0.001 99.97 99.99 0.02

2.5 99.95 99.99 0.04 99.98 99.96 0.020 99.91 99.96 0.05
3 99.89 99.88 0.01 99.73 99.76 0.029 99.90 99.81 0.09
3.5 99.76 99.99 0.23 98.64 98.81 0.176 99.26 99.80 0.54
4 99.61 99.98 0.37 95.72 94.96 0.794 99.35 99.56 0.21
4.5 99.39 99.96 0.59 83.26 81.22 2.450 98.95 97.86 1.10

Although the average inter-arrival time for each subsystem is 1/, (4) faces unitary demands while (3) faces
batch demands of size Q. Therefore, the percentage of backorders at (3) refers to lots of size Q. For example, when
(4) orders Q units, if the inventory level at (3) is just one unit under the requested quantity, i.e. Q – 1, the entire
batch has to be considered backordered, although just one unit is missing. Because of the (r, R) policy adopted by
(3), the single missing unit will be produced by the plant in a short period of time, say t0 , and (3) will be able to
fulfil the complete order with a delay of t0 . Thus, the effect on (4) is just a short delay in the batch arrival that will
make the average number of backorders equal to t0 . Thus, while a short delay is responsible for backordering Q
units at (3), the same delay is responsible for a much smaller backorder at (4).

6. Conclusion and further research development

In this paper, a decomposition approach for performance analysis of a multi-echelon supply chain has been
proposed. The approach represents a significant contribution in modelling the performance of industrial logistics
systems.
2390 S. Saetta et al.
Distribution centre Buffer out
0.20000 0.30000
0.18000 Analytic Analytic
0.25000
0.16000 Simulation Simulation
0.14000
0.20000
0.12000
0.10000 0.15000
0.08000
0.06000 0.10000
0.04000
0.05000
0.02000
0.00000 0.00000
10 9 8 7 6 5 4 3 2 1 0 12 11 10 9 8 7 6 5 4 3 2 1 0
Number of items Number of items

Buffer in SILO
0.09000 0.40000
0.08000 Analytic 0.35000
0.07000 Simulation 0.30000
0.06000
0.25000
0.05000
0.20000
0.04000
0.03000 0.15000

0.02000 0.10000
Analytic
0.01000 0.05000 Simulation
0.00000 0.00000
40 28 16 4
20

18

16

14

12

10

Number of items Number of items

Figure 3. Probability distribution inventories for test 1,  ¼ 4.

Table 5. Test 2. Average inventory level (average number of items in stock).

(1) (2) (3) (4)

 Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 28.332 28.330 0.01 14.642 14.319 2.21 10.980 10.973 0.06 7.909 7.905 0.05
2.5 27.923 27.917 0.02 14.304 14.024 1.96 10.628 10.611 0.16 7.749 7.746 0.04
3 27.493 27.501 0.03 13.725 13.951 1.65 10.157 10.127 0.29 7.578 7.578 0.00
3.5 27.096 27.064 0.12 13.609 13.409 1.47 9.479 9.419 0.63 7.404 7.398 0.08
4 26.672 26.690 0.07 13.242 13.123 0.89 8.391 8.291 1.19 7.216 7.181 0.48
4.5 26.242 25.983 0.99 12.878 12.620 2.00 6.497 6.264 3.57 7.020 6.681 4.83

Table 6. Test 2. Backorder level (percentage of backordered orders).

(1) (3) (4)


Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 0.000 0.004 N/A 0.000 0.004 N/A 0.021 0.023 9.52

2.5 0.016 0.023 43.75 0.031 0.045 45.16 0.083 0.087 4.82
3 0.110 0.084 23.64 0.268 0.378 41.04 0.219 0.248 13.24
3.5 0.331 0.161 51.33 2.238 2.686 20.02 0.557 0.591 6.10
4 0.557 0.385 30.80 12.991 17.259 32.85 1.170 1.286 9.91
4.5 1.090 1.519 39.36 19.839 20.985 5.77 2.370 4.061 71.35

The approach is able to properly model blocking and starvation states at different stages of the supply chain.
These states are usually explicitly considered in the literature when modelling production lines in manufacturing
environments. The decomposition approach presented here extends the analysis of these states to the supply chain
level by modelling the procurement and arrival processes at each echelon. In this way it is possible to understand
 International Journal of Production Research 2391
Table 7. Test 2. Customer satisfaction (percentage orders on time).

(1) (3) (4)

 Sim. An. R.E. (%) Sim. An. R.E. (%) Sim. An. R.E. (%)

2 100.000 99.999 0.00 100.000 99.998 0.00 99.985 99.985 0.00

2.5 99.998 99.997 0.00 99.983 99.979 0.00 99.955 99.950 0.00
3 99.999 99.990 0.01 99.890 99.850 0.04 99.880 99.871 0.01
3.5 99.970 99.973 0.00 99.270 99.150 0.12 99.730 99.719 0.01
4 99.180 99.938 0.76 96.660 96.014 0.67 99.481 99.442 0.04
4.5 98.850 99.840 1.00 82.930 83.356 0.51 98.450 98.461 0.02

how different replenishment policies between stages give rise to similar blocking and starvation behaviour that can
play a decisive role in the global performance of supply chains.
In particular, when designing a multi-echelon supply chain it is important to consider the interactions of the
different policies adopted and demand processes faced by each stage. The method is able to give a deep
understanding of these factors and to properly model and evaluate their mutual interactions among different stages.
Due to these interactions, if the performance analysis is limited to a single stage, misleading conclusions could be
drawn, for example on the safety stock level needed at each stage.
The numerical experiment allowed us to demonstrate that when the output buffer of a production plant is
replenished using a one-for-one policy, while ordered quantities to the buffer are in batches, customer satisfaction at
the output buffer can reach relatively low values without affecting the customer satisfaction related to the last stage
of the supply chain.
The model can be solved using a direct approach, without the need of the iterative procedures of other
decomposition approaches presented in the literature. The resultant computational speed is not to the detriment of
the quality of the approximations, as shown by the accuracy of the results obtained compared with the simulation
model. In effect, numerical tests demonstrate that the deviations in performance indicators are very small, and that
the model is able to provide reliable measures to be utilised in the design phase of a supply chain.
Future research on the topic and improvement in the decomposition procedure are warranted and should be
investigated. For instance, supply chain performance optimisation using the proposed approximations can be
looked at. On the other hand, various production/distribution scenarios with lateral shipments can be investigated
analytically. With the proposed overall approach, a variety of stochastic performance evaluation models can be
developed for supply chain networks.

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Appendix A: Markovian analysis of subsystem :(4)

The Markovian analysis of subsystem (4) involves the distribution centre that directly faces customer demand. Let It represent
the phase of the virtual machine U40 , and Nt the number of items on hand at the DC warehouse at time t. Then, due to our
assumptions of exponentiality and phase-type distributions, the stochastic process fIt , Nt , t  0g gives rise to a Markov chain.
The phases of virtual machine U40 could be 1 or 2, when it is working, and a third value indicated by S when it is starving. If T
is the maximum number of items that can be stocked in the warehouse (T ¼ R þ Q), Nt could be T, T  1, T  2, . . . , T  n, where
n  v, and v is an integer large enough to ensure that the remaining backorder probability is zero. We approximate the
procurement time using a two-moment approximation (Altiok 1997) via a MGE-2 distribution with phase rates 1 and 2, and a
transition probability between the two phases equal to b.
Figure A1 presents the state-transition diagram of the Markovian chain, which shows the flow transitions among the states
of the above stochastic process. Using the transition diagram, we build the flow balance equations and solve them to obtain the
steady-state probabilities, from which we obtain various performance measures of interest.
 International Journal of Production Research 2393

P(S,T)
λ

P(S,T-1)
λ μ2
μ1*(1-b)
P(S,T-2)
λ

P(S,T-3)
λ
μ1*b
P(1,T-Q) P(2,T-Q)
λ μ2 λ
μ1*b
P(1,T-Q-1) P(2,T-Q-1)
μ2
λ λ
μ1*b
P(1,T-Q-2) P(2,T-Q-2)

λ λ
μ1*b
P(1,T-Q-3) P(2,T-Q-3)

λ λ
μ1*b
P(1,T-2Q) P(2,T-2Q)
λ λ
μ1*b
P(1,T-2Q-1) P(2,T-2Q-1)

λ λ
μ1*b
P(1,T-2Q-2) P(2,T-2Q-2)

λ λ
μ1*b
P(1,T-2Q-3) P(2,T-2Q-3)
λ λ
μ1*b
P(1,T-3Q) P(2,T-3Q)

λ λ
μ1*b
P(1,T-3Q-1) P(2,T-3Q-1)

Figure A1. State-transition diagram of the Markovian chain.

2394 S. Saetta et al.
Various approaches are available to solve the flow-balance equations. Here we will employ the matrix recursive approach
suggested by Altiok (1997). Let us first define the following transition submatrices and probability vectors:
0 1 0 1 0 1
 0  0 1  ð1  bÞ 0    0 2 0    0
B . C B .. C B C
B  . . 0 0 C B C B 0 2 0 0 C
B C B 0 . 0 0 C B C
A¼B , B B C , C ,
B .. .. .. C
C
¼ B . . . C ¼ B .
B . .. C
C
@ 0 . . .A B .
. 0 . . .
. C @ . 0 . 0 A
@ A
0      QxQ 0 0    1  ð1  bÞ QxQ 0 0    2 QxQ
0 1 0 1 0 1
 þ 1 0  0 0 0    þ 2  0 0
B C B C B C
B   þ 1 0 0 C B0 0 0 0C B   þ 2 0 0 C
B C B C B C
D¼B . .. .. .. C , E¼B. . . .. C , F ¼B . .. .. .. C ,
B .. C B . . . C B . . C
@ . . . A @. . . .A @ . . . A
0 0   þ 1 QxQ 0 0    0 QxQ 0    þ 2 QxQ
0 1 0 1
0 1 PðS, TÞ Pð1, T  QÞ
1  b 0 0 0
B PðS, T  1Þ C B Pð1, T  Q  1Þ C
B C B C B C
B 0 1  b 0 0C B C B C
B C B PðS, T  2Þ C B Pð1, T  Q  2Þ C
G¼B . .. .. C
.. C , PðSÞ ¼ B C , Pð1, 1Þ ¼ B C ,
B .. . . .A B C B C
@ B .. C B .
. C
@. A @ . A
0 0    1  b QxQ
PðS, T  QÞ Qx1 Pð1, T  2  QÞ Qx1
0 Pð2, T  QÞ 1 0 Pð1, T  n  QÞ 1 0 Pð2, T  n  QÞ 1
B Pð2, T  Q  1Þ C B Pð1, T  n  Q  1Þ C B Pð2, T  n  Q  1Þ C
B C B C B C
B C B C B C
B C B C B C
Pð2, 1Þ ¼ B Pð2, T  Q  2Þ C , Pð1, nÞ ¼ B Pð1, T  n  Q  2Þ C , Pð2, nÞ ¼ B Pð2, T  n  Q  2Þ C :
B C B C B C
B
@ ... C
A
B
@ ... C
A
B
@ ... C
A
Pð2, T  2  QÞ Qx1 Pð1, T  ðn þ 1Þ  QÞ Qx1 Pð2, T  ðn þ 1Þ  QÞ Qx1

All matrixes A, B, C, D, E, F and G are square with dimensions Q  Q; vectors P(S ), P(1, 1), P(2, 1), . . . , P(1, n), P(2, n) have
dimensions of Q  1, where n ¼ 2, . . . , v. That is, we can write the following steady-state flow balance equations:

½A  PðSÞ ¼ ½B  Pð1, 1Þ þ ½C   Pð2, 1Þ, ðA1 Þ

(
½D  Pð1, n  1Þ ¼ ½B  Pð1, nÞ þ ½C   Pð2, nÞ þ ½E   PðS Þ, ðA2 Þ
for n ¼ 2,
½F   Pð2, n  1Þ ¼ ½G  Pð1, n  1Þ, ðA3 Þ
(
½D  Pð1, nÞ ¼ ½B  Pð1, n þ 1Þ þ ½C   Pð2, n þ 1Þ þ ½E   Pð1, n  1Þ, ðAa Þ
for n ¼ 3, . . . , v
½F   Pð2, nÞ ¼ ½G  Pð1, nÞ þ ½E   Pð2, n  1Þ: ðAb Þ
The matrix-recursive approach allows us to group equations in such way that it is possible to express the probability that T – nQ
items are in the buffer in terms of PðT  n  Q þ 1Þ, PðT  n  Q þ 2Þ, PðT  n  Q þ 3Þ, . . . , PðT Þ.
By substituting (A3) in (A1), we obtain P(1, 1) in terms of P(S ) and consequently P(2, 1) in terms of P(S). For n ¼ 3, . . . , v–1,
we update P(2, n  1) in P(2, n) and substitute (Ab) in (Aa). Eventually, we have a recursive formulation for all the probability
vectors:
8
>
> Pð1, 1Þ ¼ ½Zð1Þ  PðSÞ, Zð1Þ ¼ f½B þ ½C   ½F 1  ½Gg1  ½A,
>
> Pð2, 1Þ ¼ ½Zð1Þ   PðSÞ, Zð1Þ ¼ ½F 1  ½G  ½Zð1Þ,

>
>
>
>
>
> Zð2Þ ¼ f½B þ ½C   ½F 1  ½Gg1
>
> Pð1, 2Þ ¼ ½Zð2Þ  PðSÞ,
>
>  f½D  ½Zð1Þ  ½C   ½F 1  ½E   ½F 1  ½G  ½Zð1Þ  ½E g,
<
Pð2, 2Þ ¼ ½Zð3Þ  PðSÞ, Zð3Þ ¼ f½F 1  ½G  ½Zð2Þ  ½F 1  ½E   ½F 1  ½G  ½Zð1Þg, ðAA Þ
>
> 1 1
>
> Zð4Þ ¼ f½B þ ½C   ½F   ½Gg
>
> Pð1, 3Þ ¼ ½Zð4Þ  PðSÞ,
>
>
>
>  f½D  ½Zð2Þ  ½E   ½Zð1Þ  ½C   ½F g1  ½E   ½Zð3Þ,
>
>
> Pð2, 3Þ ¼ ½Zð5Þ  PðSÞ,
> Zð5Þ ¼ ½F 1  f½G  ½Zð4Þ þ ½E   ½Zð3Þg,
:
...


Pð1, nÞ ¼ ½Zðn þ aÞ  PðSÞ, for n ¼ 4, . . . , ðv  1Þ,
ðBB Þ
Pð2, nÞ ¼ ½Zðn þ a þ 1Þ  PðSÞ, and a ¼ 2, 4, 6, . . . ,
 International Journal of Production Research 2395
where, for all n ¼ 4, . . . , ðv  1Þ and a ¼ 2, 4, 6, . . . ,
8
>
> Zðn þ aÞ ¼ f½B þ ½C   ½F 1  ½Gg1
>
<  f½D  ½Zðn þ a  2Þ  ½E   ½Zðn þ a  4Þ  ½C 
ðBB Þ
>
>  ½F 1  ½E   Zðn þ a  1Þg,
>
:
Zðn þ a þ 1Þ ¼ ½F 1  f½G  ½Zðn þ aÞ þ ½E   ½Zðn þ a  1Þg:
Thus, all the probability vectors are expressed in terms of P(S ). In order to evaluate all the unknown probability vectors, more
information is needed. Recall that v is an integer large enough to ensure that the probability of having a backorder n 4 v is
approximately zero, and, for n ¼ v  1, we can assert that the probability vectors P(1, n þ 1) and P(2, n þ 1) are almost zero.
We let P(1, n þ 1) and P(2, n þ 1) be one, then we can evaluate P(S) using

PðS Þ ¼ f½D  ½ZðnÞ  ½E   ½Zðn  2Þg1  fð½B þ ½C Þ  ½ONESðQ, 1Þg, ðCC Þ

where ONES(Q, 1) is a vector of dimensions Q  1 with all elements equal to 1.
As soon as P(S ) is evaluated, all the other probability vectors can be calculated. Next, we need to normalise all the
probabilities. Recall that we have assumed that P(1, n þ 1) and P(2, n þ 2) are both equal to one. That is, we can write
X
v
p ¼ PðSÞ þ ½Pð1, nÞ þ Pð2, nÞ,
n¼1
1
p ¼ ,
p
P ðS Þ ¼ p  PðSÞ,
 
P ð1, nÞ ¼ p  Pð1, nÞ,
for n ¼ 1, . . . , ðv  1Þ:
P ð2, nÞ ¼ p  Pð2, nÞ,
Finally, we can express the probability distribution of NT as follows:

NT ¼ P ðSÞ,
NT1 ¼ P ð1, 1Þ þ P ð2, 1Þ,
NT2 ¼ P ð1, 2Þ þ P ð2, 2Þ,
NT3 ¼ P ð1, 3Þ þ P ð2, 3Þ,
...
NTn ¼ P ð1, nÞ þ P ð2, nÞ,
where n and v were defined at the beginning of the appendix.
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