The effect of (s,S) ordering policy on the supply chain

In many supply chains, the variability of orders may considerably increase relative to the variability of the buyers' demand. This variability increase is largely an effect of the ordering policy. This phenomenon, which has become known as the bullwhip effect, makes supply chain planning difficult. We consider the following three basic elements of a supply chain; the purchase orders of the individual retailers, the aggregate orders of the retailers, and the supplier's ordering/production policy. A complex multi-echelon distribution system can also be analyzed by combining these elements. We investigate how the (s,S) policy parameters, the demand parameters, and the cost coefficients influence the variability of the orders by using approximations to the exact quantitative models. The accuracy of the approximations is acceptable in most cases of practical importance. We show how demand correlation can decrease the variability of aggregate orders, and how autocorrelation in buyer's orders can smooth the supplier's ordering policy. However, these variability reductions are usually not considerable. Small frequent orders can reduce the effect of high variability and the resulting uncertainty.