Order-up-to-level policy update procedure for a supply chain subject to market demand uncertainty

• Published in: Computers & industrial engineering Vol. 113; pp. 347 - 355
• Main Authors: Pacheco, Eduardo de Oliveira, Cannella, Salvatore, Lüders, Ricardo, Barbosa-Povoa, Ana Paula
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.11.2017
• Subjects: Bullwhip effect; Discrete event simulation; Inventory control; Order-up-to-level policy; Supply chain; Supply chain; Bullwhip effect; Inventory control; Order-up-to-level policy; Discrete event simulation
• ISSN: 0360-8352; 1879-0550
• DOI: 10.1016/j.cie.2017.09.015

•We propose a new dynamic order policy for a supply chain with uncertainty in demand.•Inventory consumption occurs at random time intervals and demand a random quantity of items.•The new order policy avoids propagation of uncertainty through SC levels.•This policy mitigates the bullwhip effect, minimizes stockout, and increases the customer service level. The planning of a supply chain (SC) subject to market demand uncertainty is challenging in regards to defining update mechanisms that deal with demand variations. This study addresses this challenge and proposes a new reorder point update procedure for order-up-to-level (OUTL) policies in continuous review systems. The new procedure modifies the classical OUTL policy by introducing absorption inventory, a concept that changes reorder points and lot sizes according to demand variations. Results obtained through a discrete event simulation based on real-world data provided by a Brazilian company show that the proposed order policy provides better performance, particularly in terms of bullwhip effect reduction and improved service level.