DEMAND VARIABILITY IN SUPPLY CHAINS

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DEMAND VARIABILITY IN SUPPLY CHAINS Eren
Anlar
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Literature Review

• Deuermeyer and Schwarz (1981) and Svoronos and
  Zipkin (1988) provide techniques to approximate
  average costs in a continuous review model with
  Poisson demand. Both assume no restriction on
  when the retailers may order.
• Shapiro and Byrnes (1992) examine demand
  variance in the medical supply industry. Their
  result suggest that reducing the suppliers
  demand variance may benefit a supply chain.
• Lee et al. (1997) identifies the four causes of
  the bullwhip effect, which is the common name
  given to the common observation that demand
  variance propagates up a supply chain.

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Literature Review

• Drezner et al. (1996) and Chen et al. (1997)
  studied demand updating.
• Cohen and Baganha (1998) consider supply chain
  demand variance, but do not consider strategies
  for reducing the variance of the retailers
  orders.
• Cachon (1999) shows that there are five
  variables that influence the suppliers demand
  variance, which are the consumer demand
  variability, the number of retailers, the
  retailers batch size, the retailers order
  interval length, and the alignment of the
  retailers order intervals.

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Literature Review

• Axsater (1993) and Chen and Zheng (1997) provide
  exact methods to approximate average costs in a
  continuous review model with Poisson demand.They
  assume no restriction on when retailers may
  order.
• Cachon (1995) provides an exact algorithm for
  periodic review. Assumes no restriction on when
  retailers may order.
• Chen and Samroengraja (1996) obtain exact
  results for a model in in which retailers
  implement base stock policies at fixed intervals
  and only one retailer orders at a time.

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Literature Review

• Eppen and Schrage (1981) study a two-echelon
  model in which the supplier receives inventory at
  fixed intervals
• Federgruen and Zipkin (1984), Jackson (1988),
  Jackson and Muckstadt (1989), McGavin et al.
  (1993), Nahmias and Smith (1994) Graves (1996)
  allow shipments to retailers at intermediate
  times between replenishments to the supplier,
  allowing the supplier to hold some stock. They
  all assume synchronized ordering and unit
  ordering.
• Song (1994) showed, for a particular definition
  of demand variability, that the buffer cost will
  increase with increasing variability.

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Literature Review

• Lee et al. (1996) show that the suppliers
  actions do not impact the retailers, nor do the
  retailers actions influence the suppliers
  demand variance. They assume synchronized
  ordering and retailers orders are always filled
  either by the supplier or an outside source.
• Aviv and Federgruen (1998) consider both
  synchronized and balanced alignments and find
  that balanced ordering generally has lower costs.
  Their model has heterogeneous retailers and a
  supplier capacity constraint.

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Literature Review

• Kelle et al. (1999) conclude that negative
  effect of high variability and uncertainty can be
  decreased by small frequent orders. These orders
  are economical for the partners in the supply
  chain if the ordering costs are small relative to
  the inventory holding cost.

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• Fisher and Raman (1996)
• Quick Response apparel industry initiative
  intended to cut manufacturing and distribution
  lead times through a variety of means,
  particularly the cost of excess inventory that
  must be sold below cost at the end of the season
  and of lost sales due to inventory stockouts.
• They showed that Quick Response could reduce
  stockout and markdown costs by reducing lead time
  sufficiently to allow a portion of production to
  be committed after some initial demand has been
  observed.

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• Ridder et al. (1998)
• Considers a Newsvendor problem
• Concludes that reduction of the demand
  uncertainty in stochastic production and
  inventory systems is economically favorable for
  most demand distributions.
• However, for some demand distributions a
  reduction of the demand uncertainty will not
  result in the desired cost reduction.

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Cachon (1999)

• The numerical example shows that balancing the
  retailers order does reduce costs.
• A reduction in the suppliers demand variance
  will further reduce the suppliers average
  inventory.
• Two strategies that both reduce the suppliers
  demand variance and total supply chain costs
• Balancing retailer order intervals effective in
  broad range of conditions.
• Flexible quantity strategy the retailers order
  frequency is held relatively constant by
  increasing the retailers order intervals and
  decreasing the fixed batch size. This is
  effective when there are few retailers and
  consumer demand variability is low. In addition,
  effective when the supplier is required to
  provide a high fill rate.

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Cachon (1999)
Model

• One supplier distributes a single product to N
  identical retailers.
• Retailers implement scheduled ordering policies
  (i.e. Orders occur at fixed intervals and are
  equal to some multiple of a fixed batch size),
  which influences the propagation of demand
  variance within a supply chain.

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Cachon (1999)

• Sequence of events at each period
• Demand is realized
• Firms submit orders to their inventory sources
• Shipments are released
• Costs are assessed
• Shipments are received
• Suppliers demand variance is maximized then the
  retailers orders are synchronized (i.e. all
  retailers order in the same periods). It is
  minimized when the retailers orders are balanced
  (i.e. same number of retailers order each
  period).

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Cachon (1999)

• Two benefits of low supplier demand variance
• For a fixed supplier fill rate, lower demand
  variance allows the supplier to carry less
  inventory on average.
• For a fixed supplier average inventory, lower
  demand variance reduces the retailers average
  lead time.
• However, increasing the retailer order intervals
  raises retailers holding and backorder costs.
  Also, decreasing batch size raises ordering
  costs.
• Dampening the suppliers demand is only
  reasonable if the suppliers costs represent a
  significant fraction of overall supply chain
  costs and if this action does not substantiallly
  raise the retailers costs.

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Conclusion

• Reducing a suppliers demand variance is an
  objective to adopt selectively.
• Advantegous when inventory holding costs are
  high relatively to ordering costs.
• Whether a reduction in demand uncertainty will
  result in cost reduction depends on many factors,
  such as, the definition of uncertainty, the
  structure of the demand distributions, and the
  ratio between the overage and underage costs.

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