Investigating the demand propagation in EOQ supply networks using a probabilistic model

Abstract

In this paper, we introduce a new demand probabilistic approach, named M.DPA.eoq (Montanari Demand Probabilistic Approach in economic order quantity [EOQ] scenario), for predicting the demand seen by an upper tier echelon (e.g. a distribution centre) of a supply network, serving several lower tier echelons operating according to an EOQ reorder policy. The M.DPA.eoq is based on an analytic approach, by which we derive the distribution of the demand seen by the upper tier echelon of the supply network. The approach has been designed to be very simple, so as to gain in pedagogical value. The simplicity and ease of application of this approach are confirmed by the possibility of exploiting general purpose software, such as Microsoft ExcelTM, to implement and validate it. Moreover, the M.DPA.eoq has potential to be directly exploited by practitioners, such as supply network managers, to estimate the distribution of the demand the upper tier echelon will face under a defined network structure. Students and researchers could also benefit from such a model, given its ease of understanding and usage. With the purpose of showing its potential usefulness in real cases, we discuss two practical implications of the M.DPA.eoq, referring to the use of its results for: (1) computing the bullwhip effect of the network; and (2) analysing the impact of each retail store on the variance of the demand seen by the upper tier echelon.