Mitigating variance amplification under stochastic lead-time: The proportional control approach

Abstract

Logistic volatility is a significant contributor to supply chain inefficiency. In this paper we investigate the amplification of order and inventory fluctuations in a state-space supply chain model with stochastic lead-time, general auto-correlated demand and a proportional order-up-to replenishment policy. We identify the exact distribution functions of the orders and the inventory levels. We give conditions for the ability of proportional control mechanism to simultaneously reduce inventory and order variances. For AR(2) and ARMA(1,1) demand, we show that both variances can be lowered together under the proportional order-up-to policy. Simulation with real demand and lead-time data also confirms a cost benefit exists.