Coordinating lead times and safety stocks under autocorrelated demand

Robert Boute*, Stephen M. Disney, Marc R. Lambrecht, Benny Van Houdt

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

We consider a supply chain in which orders and lead times are linked endogenously, as opposed to assuming lead times are exogenous. This assumption is relevant when a retailer's orders are produced by a supplier with finite capacity and replenished when the order is completed. The retailer faces demands that are correlated over time - either positively or negatively - which may, for example, be induced by a pricing or promotion policy. The auto-correlation in demand affects the order stream placed by the retailer onto the supplier, and this in turn influences the resulting lead times seen by the retailer. Since these lead times also determine the retailer's orders and its safety stocks (which the retailer must set to cover lead time demand), there is a mutual dependency between orders and lead times. The inclusion of endogenous lead times and autocorrelated demand represents a better fit with real-life situations. However, it poses some additional methodological issues, compared to assuming exogenous lead times or stationary demand processes that are independent over time. By means of a Markov chain analysis and matrix analytic methods, we develop a procedure to determine the distribution of lead times and inventories, that takes into account the correlation between orders and lead times. Our analysis shows that negative autocorrelation in demand, although more erratic, improves both lead time and inventory performance relative to IID demand. Positive correlation makes matters worse than IID demand. Due to the endogeneity of lead times, these effects are much more pronounced and substantial error may be incurred if this endogeneity is ignored.

Original languageEnglish (US)
Pages (from-to)52-63
Number of pages12
JournalEuropean Journal of Operational Research
Volume232
Issue number1
DOIs
StatePublished - Jan 1 2014

Keywords

  • Autocorrelated demand
  • Operations/marketing interface
  • Production-inventory model

ASJC Scopus subject areas

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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