A simple approach for assessing the cost of system nervousness

Abstract

Abstract A well-known problem in coordinating supply chain inventories is that replenishment decisions are revised due to stochastic demands. This issue is often referred to as system nervousness. The literature distinguishes between two types of nervousness: setup-oriented and quantity-oriented. It is widely accepted that cost of nervousness is difficult to measure. We argue that this cost can be evaluated by means of three well-established inventory control strategies: static uncertainty, dynamic uncertainty, and static-dynamic uncertainty. These strategies reflect extreme cases with regard to the setup- and the quantity-oriented nervousness, and provide a simple yet an objective measure to assess the cost of system nervousness. Our results are of practical importance. We highlight that the setup-oriented nervousness, which is considered to be the most critical in practice, can be eliminated with a minor cost penalty. This is, however, not the case for the quantity-oriented nervousness.