Abstract
In this paper we apply linear control theory to study the effect of various inventory policies on order and inventory variability, which are key drivers of supply chain performance. In particular, we study a three-echelon supply chain with a stationary demand pattern under the influence of two inventory policies: an installation-stock policy that bases orders on the inventory position (on-hand plus on-order inventory) at an installation, and an echelon-stock policy that bases orders on the inventory position at that installation and all downstream installations. We have shown that the installation-stock and echelon-stock policies are stable and analyze their effect on order and inventory fluctuation. Specifically, we show the superiority of the echelon-stock policy with control theory performance measure frequency response plot.
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