Improving supply chain performance : real-time demand information and responsive deliveries

K.H. Shang, S.Y. Zhou, G.J.J.A.N. Houtum, van

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Abstract

In some supply chains, materials are ordered periodically according to local information. This paper investigates how to improve the performance of such a supply chain. Specifically, we consider a serial inventory system in which each stage implements a local reorder interval policy, i.e., each stage orders up to a local base-stock level according to a fixed-interval schedule. A fixed cost is incurred for placing an order. Two improvement strategies are considered: 1) expanding the information flow by acquiring real-time demand information; and 2) accelerating the material flow via flexible deliveries. The first strategy leads to an reorder interval policy with full information; the second strategy leads to an reorder point policy with local information. Both policies have been studied in the literature. Thus, to assess the benefit of these strategies, we analyze the local reorder interval policy. We develop a bottom-up recursion to evaluate the system cost and provide a method to obtain the optimal policy. A numerical study shows the following: Increasing the flexibility of deliveries lowers costs more than does expanding information flow; the fixed order costs and the system lead times are key drivers that determine the effectiveness of these improvement strategies. In addition, we find that using optimal batch sizes in the reorder point policy and demand rate to infer reorder intervals may lead to significant cost inefficiency.
Original languageEnglish
Place of PublicationDurham
PublisherDuke University Press
Number of pages34
Publication statusPublished - 2008

Publication series

NameWorking paper Fuqua School of Business, Duke University
VolumeFRPS07-246

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