The effect of lot sizing rules on order variability

The effect of lot sizing rules on order variability

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Article ID: iaor20052575
Country: Netherlands
Volume: 159
Issue: 3
Start Page Number: 617
End Page Number: 635
Publication Date: Dec 2004
Journal: European Journal of Operational Research
Authors:
Keywords: inventory: order policies
Abstract:

Previous papers have presented the impact of various aspects, such as forecasting techniques, centralising information, and (s, S) ordering policy, on the variability of orders in a supply chain. In this paper we observe several properties of two traditional lot sizing rules, the Silver Meal (SM) and the least unit cost (LUC) on the variability of orders created by a supply chain channel receiving demand with stochastic variability from its downstream channel. Analytical models have been developed to compare the mean and variance of both order interval and order quantity produced by the two rules under relatively low demand variability. We show that, although the two rules appear to be very similar, they exhibit interestingly different behaviour. The SM rule is shown to produce a series of orders with more stable interval between orders but with more variable order quantities. Conversely, the LUC rule results in more stable order quantities but more variable order intervals. The study also reveals that addition of an appropriate amount of extra quantity to an order could significantly reduce order variability. With an increasing concern on the amplification of order variability in supply chains recently, the results provide interesting insights on the choice of lot sizing rules to be applied by a channel of a supply chain in determining ordering policies.

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