Proportional order-up-to policies for closed-loop supply chains: the dynamic effects of inventory controllers

Abstract

ABSTRACT Increasing the understanding of the management of closed-loop supply chains (CLSCs) is fundamental to accelerate the much-desired transition towards the circular economy. From this perspective, we investigate the value of proportional order-up-to policies (POUT) policies and the adjustment of their inventory controllers in these systems. These policies are often used to improve the performance of traditional supply chains due to their ability to cope with the damaging bullwhip effect; however, they have not been sufficiently studied in CLSCs. Through a difference equation modelling approach, we show that POUT policies are also a valuable instrument for enhancing the CLSC dynamics. Specifically, we find that the POUT model outperforms the traditional order-up-to policy in a hybrid manufacturing/remanufacturing system, yielding significant cost savings. To optimise the key trade-off between order and inventory variability, the tuning of the inventory controllers needs to consider not only the cost structure of the CLSC but also the average return rate. Specifically, managers should react to increasing levels of circularity by lowering the setting of the controllers’ time constant. In the light of our findings, we suggest two strategies for aligning the calibration of the POUT controllers and the forecasting methods to increase the economic performance of CLSCs.