Arrangement of Inventory Policies across Echelons of the Supply Chain for Minimization of Cost and Variance of Inventory

Abstract

A model is built to study the impact of the variance of demand on the supply chain inventory and also to identify the best arrangement of the inventory policy across the supply chain. The basic objective of Inventory management by an entity is either to prevent stock out or lock up of working capital. However, benefit of individual entity might not result in value to supply chain. A simulation study was undertaken on the four-echelon supply chain by varying demand at retailer echelon in phases from 10% to 70%. The best arrangement of inventory policy (choosing policy for each echelon from a choice of six familiar policies) across the supply chain is identified for attaining objective of minimization of either cost or variance. It is found that the both the demand flow and moving average policy are dominant inventory policies in attaining these objectives. Contemporary information of demand at retailer echelon drives the costs minimization and variance minimization of the supply chain. Study also identifies the best arrangement for the objective of cost minimization at the each echelon too. The arrangement of inventory policy identified for individual echelon benefit varies from the best arrangement identified for the supply chain benefit. This substantiates that the individual echelon benefit would be deterrent to the value of the supply chain.