Inventory Imbalance Research Articles

The System Dynamics Analyses of Bullwhip Effect in China Processed Oil Supply Chain

Bullwhip effect is a serious problem in supply chain management, it brings about production disorder, inventory imbalance, business process obstruction, waste of resources and market chaos. Our processed oil supply chain is so a large complicated system that bullwhip effect of it is more serious. To deal this problem, this paper discussed China processed oil supply chain, aim at maintaining processed oil supply, analysed the strength of bullwhip effect in the chain, proved delay is the basic reason of bullwhip effect and pointed out reducing delay is the key point to weaken bullwhip effect. We used system dynamics analysis and Anylogic simulation software to get the conclusion. Finally, we put forward some effective strategies to deal with bullwhip effect in China processed oil supply chain for improving the chain's operating efficiency.

Competitive Markdown Timing for Perishable Products

We study markdown timing decisions for perishable products in the presence of competition. We model as a duopoly two firms selling their fixed stocks of two substitutable items in a given selling horizon. Each firm starts with a common initial price, and has the option to decrease the price once during the selling season. The prices, corresponding demand rates and inventory levels are public information. The problem for each firm is to determine when to decrease its price (markdown) in order to maximize its revenue. We showthat the existence and characterization of a pure-strategy Nash equilibrium depend critically on the demand rate that a firm enjoys as a monopoly when its competitor runs out of stock relative to three thresholds. When the monopoly demand rate is smaller than all three thresholds, we show that neither firm has the incentive to force its rival to run out of stock and that if a firm marks its price down after the season starts, it ensures that its inventory runs out precisely at the end of the season. When the monopoly demand rate is larger than the first threshold, waiting until its rival runs out of inventory may be an equilibrium strategy for the larger firm. When the monopoly demand rate is larger than one of the last two thresholds, we show that there may be no pure-strategy equilibrium in the game. In all possible equilibria, the larger firm marks its price down earlier than the smaller firm. We also show that some of the usual monotonicity results may fail to hold in the presence of competition. In particular, a firm’s revenue may be decreasing in its starting inventory. We also show that the difference between markdown times can be clearly represented as a function of inventory imbalance and level of demand interaction. Although our results hold for any arbitrary demand function, we also interpret them in the context of linear and attraction demand models.

Dealer Intermediation between Markets

Dealers are intermediaries between different market segments. A dealer typically maintains a network of customer relationships (B2C) and simultaneously participates in an inter-dealer market (B2B) which allows him to manage his inventory. We represent this market interface role in a new dynamic model of dealer intermediation between a monopolistic B2C market and a competitive B2B market. Dealers face inventory constraints and adverse selection. We characterize their optimal quote setting and inventory management behaviour in both markets in closed form and show the existence of a unique and stable equilibrium. The model provides new insights into the interdependence of quote quality in the B2C and B2B segment. The model implications are then tested for the European sovereign bond market. We use a new synchronized data set of B2B and B2C quotes and trades. The model can explain (i) the high dispersion of quoted and executed customer prices due to the inventory dependence of optimal quotes, (ii) why this dispersion of B2C quote quality dramatically increases in bond duration, (iii) the more pronounced bid-ask spread deterioration under volatility increases for the inter-dealer market, (iii) why aggregate dealer inventory imbalances coincide with asymmetric execution quality between the bid and ask side in the customer segment. We argue that the alternative explanations of discriminatory dealer pricing based on customer type cannot account for the evidence.

Periodic Resource Reallocation in Two-Echelon Repairable Item Inventory Systems

Given an existing stock allocation in an inventory system, it is often necessary to perform reallocation over multiple time points to address inventory imbalance and maximize availability. In this paper, we focus on the situation where there are two opportunities to perform reallocation within a replenishment cycle. We derive a mathematical model to determine when and how to perform reallocation. Furthermore, we consider the extension of this model to the situation allowing an arbitrary number of reallocations. Experimental results show that the two-reallocation approach achieves better performance compared with the single-reallocation approach found in the literature. We also illustrate how to apply the proposed model to design cost-optimal periodic resupply policies.

Price Discovery in Markets with Multiple Dealers

Dealers learn about asset values as they set prices and absorb informed order flow. These flows cause inventory imbalances. This study models price setting in markets such as foreign exchange, U.S. treasury bonds, European sovereign bonds, and the London Stock Exchange, where market makers have multiple instruments to smooth inventory imbalances and update priors about asset values. Estimating a dealer pricing model with multiple instruments for inventory control and information-gathering yields support for what at times have been elusive inventory and asymmetric information effects. The model presented yields direct measures of the structural-liquidity cost parameters faced by market makers, akin to Kyle's Lambda. For example, the estimates presented suggest that a $10 million incoming purchase pushes price up by roughly one basis point, and dealers expect to immediately lay off one-third of every incoming order. Compared with estimates of price setting in single dealer markets, price shading is found to have a smaller role in inventory management and information effects are shown to be stronger. Hence, estimating traditional microstructure models (based on only one market maker per asset) on data from asset markets where market makers have multiple instruments misses information from sources other than incoming order flows, and overemphasizes price shading in managing inventories.

Role of logistics in enhancing competitive advantage

PurposeThe purpose of this paper is to describe the issues, tradeoffs, and models relating to two important sets of problems that arise in supply chain management – complexities in extended supply chains and network coordination in globally dispersed supply chains. This paper highlights the role of logistics in enhancing the competitiveness of firms that operate a global supply chain.Design/methodology/approachThe methodology used in this paper encompasses conceptual research and detailed literature review of key issues.FindingsThis review indicates that the key challenges faced by supply chain managers due to extended supply chains are non‐stationary demand, variability propagation, and inventory imbalances. For network coordination managers must determine the role of facilities in a global network, identify the optimal location and capacity of facilities as well as role of consolidation hubs. For the above challenges, the tradeoffs in terms of four key drivers of supply chain performance – transportation, inventory, information, and facilities and relate these to key measures of supply chain performance are described. Important directions for future research are also identified.Research limitations/implicationsTest cases are needed to validate and refine the framework presented. Developing case studies that gather appropriate data to test out the models described would be important.Practical implicationsCompanies with a global supply chain as well as third party logistics companies will find the framework presented in this paper very useful.Originality/valueA new integrated framework that incorporates key decision issues like complexities of extended supply chains and network coordination into the firm's decision making has been presented. This has not been reported in previous research.

Forecasting Real Inventories and the Anomaly of Money Illusion

While the transmission mechanism of inventory behavior in the business cycle has been studied, less effort has been devoted to applied forecasting of inventory change. Inventory fluctuations have accounted for a sizable portion of the changes in U.S. GDP during recessions over the past fifty years. In this paper, we report on out-of-sample forecasts of manufacturing and trade inventories generated by regression and neural network methodology. Our forecasting model is Metzlerian in approach, in that the divergence between actual and targeted sales is hypothesized as the primary cause of inventory imbalance. Our forecasts also rely on the slow adjustment of inventory investment to sales surprises. However, the likely presence of money illusion is a caveat to users, and we address several distortions it introduces to inventory management measures.

Inventory Dynamics and Business Cycles: What has Changed?

To what extent can information-technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid-1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid-1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry-level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.

Inventory Dynamics and Business Cycles: What Has Changed?

To what extent can information‐technology led improvements in inventory management account for the apparent moderation of economic fluctuations in the United States since the mid‐1980s? We argue that changes in inventory dynamics played a reinforcing—rather than a leading—role in the reduction of output volatility. Since the mid‐1980s, inventory dynamics have changed in a manner consistent with a faster resolution of inventory imbalances. However, these changes appear to be a consequence of changes in the response of industry‐level sales and aggregate economic activity to monetary policy shocks. Our results suggest that it is the interaction between the changes in inventory behavior at the industry level and the macroeconomic environment—where the latter likely includes changes in the conduct of monetary policy and the responses of the economy to policy disturbances—rather than any single factor, that has contributed importantly to the observed decline in economic volatility.

Integrated Real-Time Capacity and Inventory Allocation for Reparable Service Parts in a Two-Echelon Supply System

Two critical decisions must be made daily when managing multiechelon repair and distribution systems for service parts: (1) allocating available repair capacity among different items and (2) allocating available inventories to field stocking locations to support service operations. In many such systems, procurement lead times for service parts are lengthy and variable, repair capacity is limited, and operational requirements change frequently—resulting in demand processes that are highly uncertain and nonstationary. As a consequence, it is common to have many items in short supply while others are abundant. In such environments, integrated real-time decision-support tools can provide significant value by reducing the impact of inventory imbalances and responding appropriately to the volatile nature of the demand processes. By “integrated” and “real-time,” we mean (respectively) tools that simultaneously consider key aspects of the current state of the operating environment in deciding what items to repair, where to ship available units, and by what mode to ship them. In this paper, we develop an integrated real-time model for making repair and inventory allocation decisions in a two-echelon reparable service parts system. We formulate the decision problem as a finite-horizon, periodic-review mathematical program, we show it can be formulated as a large-scale linear program, and we develop a practical heuristic method for solving the problem approximately. By simulating the operation of a service parts supply chain, we demonstrate the value of employing integrated decision models over using separate repair and inventory allocation rules for a range of environments where inventory imbalances exist. We also show that our heuristic approach is highly effective and that its inventory allocation subroutine, used as a stand-alone tool for making distribution decisions, outperforms a commonly used inventory allocation rule in most circumstances tested.

Who trades IPOs? A close look at the first days of trading

I examine the enormous trading volume in the first two days of trading following an initial public offering (IPO) with a sample of Nasdaq IPOs. The composition of trading varies widely with the initial return and not all trading is investor-related. Cold IPOs have a high proportion of interdealer sell trades, whereas hot IPOs have balanced investor buying and selling. Market makers hold zero inventory throughout trading, offsetting any investor inventory imbalance with a trade with the lead underwriter. The paper also helps resolve the disconnect reported in the literature between high initial trading volume and low “flipping” activity.

Why is There Heterogeneity Among Dealers' Behavior during the Nasdaq Preopening Session?

Order preferencing enables a market-maker to execute captive order flow off the primary market. This practice is known to generate wider spreads due to its anti-competitive effects. It also increased inventory risks for dealers. The Nasdaq preopening offers a laboratory to test whether market-makers use non-binding prices as a tool to control their inventory position. We find that the most preferred category of market-makers - called 'the wholesalers' - participate the most actively in the communication game taking place during the preopening session. This category contributes, however, the least to the price discovery process. Besides, unlike other dealers, wholesalers communicate more on stocks with a high degree of order preferencing and are more likely to be on the inside spread when communicating more. These findings suggest that they initiate signals to reduce inventory imbalances due to preferencing. Finally, we find that the reversal of the wholesalers' price is the largest at the opening, which supports the hypothesis that they are the most exposed to inventory imbalances. Moreover, the best prices (the NBBO) also have a transitory component at the opening, which corroborates our main hypothesis that the Nasdaq non-trading mechanism incorporates inventory information into prices.

Inventory Dynamics and Business Cycles: What Has Changed?

Despite the recent patch of sluggish growth, the U.S. economy has experienced a period of remarkable stability since the mid-1980s. One popular explanation attributes the diminished variability of economic activity to information-technology-led improvements in inventory management. Our results, however, indicate that the changes in inventory dynamics since the mid-1980s played a reinforcing--rather than a leading--role in the volatility reduction. Movements in the volatility of manufacturing output over the past three decades almost entirely reflect changes in the variability of the growth contribution of sales. Although the volatility of total inventory investment has fallen, the decline occurred well before the mid-1980s and was driven by the reduced variability of materials and supplies. Our analysis does show that since the mid-1980s, inventory dynamics have played a role in stabilizing manufacturing production: Inventory "imbalances" tend to correct more rapidly, and the quicker response of inventories to monetary policy and commodity price shocks buffers production from fluctuations in sales to a greater extent. But more extensive production smoothing and faster dissolution of inventory imbalances appear to be a consequence of changes in the way industry-level sales and aggregate economic activity respond to shocks, rather than a cause of changes in macroeconomic behavior.

An Intraday Pricing Model of Foreign Exchange Markets

Market makers learn about asset values as they set intraday prices and absorb portfolio flows. Absorbing these flows causes inventory imbalances. Previous work has argued that market makers change prices to manage incoming flows and offset inventory imbalances. This study argues that they have multiple instruments, or ways to manage inventory imbalances and learn about evolving asset values. Hence, they smooth inventory levels and update prior information about assets using multiple instruments. In ignoring other instruments, previous studies have ignored the information that these provide and overemphasize the role of price changes in inventory management. The model presented here provides new estimates of asymmetric information and inventory effects, the price impact of each instrument, the cost of liquidity, and the impact of an intervention on these costs.

How has the euro changed the foreign exchange market?

This paper examines the primary forex statistics for the euro in relation to the German mark prior to 1999. Contrary to widespread expectations, our evidence indicates that the euro lost ground against the US dollar in forex spot trading and in some dimensions does not even match the international transaction role of the German mark. We argue that the euro changed the forex market structure and particularly increased market transparency through currency elimination. The higher market transparency exposes the dealers to higher inventory risk as his inventory imbalances are revealed more easily to other dealers. Dealers in the euro markets recover increased inventory costs through higher spreads that make the euro a less attractive transaction medium than the German mark. We explore the policy implications for the ECB, for euro outsiders and reflect upon the future of the forex market.

Value Analysis and Optimization of Reusable Containers at Canada Post

We analyzed the use and sharing of a logistics package, a returnable container, often out of stock, between Canada Post and its large mailing customers. Standardizing and sharing logistical packaging should bring members of a supply chain tangible benefits from productivity and efficiency gains. We determined that inventory imbalance between supply locations and demand locations caused the problem. We found that different accounting methods gave very different results in calculating the benefits. We concluded that there is always a benefit for the mailer. For Canada Post to benefit, however, the container must be returned quickly. We used a minimum-cost-flow model to confirm that the company has enough containers to satisfy demand. With better planning and control of the inventory, Canada Post can prevent disequilibrium between supply and demand.

A computationally efficient approach for determining inventory levels in a capacitated multiechelon production-distribution system

The system under study is a single item, two-echelon production-inventory system consisting of a capacitated production facility, a central warehouse, and M regional distribution centers that satisfy stochastic demand. Our objective is to determine a system base-stock level which minimizes the long run average system cost per period. Central to the approach are (1) an inventory allocation model and associated convex cost function designed to allocate a given amount of system inventory across locations, and (2) a characterization of the amount of available system inventory using the inventory shortfall random variable. An exact model must consider the possibility that inventories may be imbalanced in a given period. By assuming inventory imbalances cannot occur, we develop an approximation model from which we obtain a lower bound on the per period expected cost. Through an extensive simulation study, we analyze the quality of our approximation, which on average performed within 0.50% of the lower bound. © 2000 John Wiley & Sons, Inc. Naval Research Logistics 47: 377–398, 2000

The Predictability of Short-Horizon Stock Returns

This examines the predictability of short-horizon stock returns in the UK. We show that the subsequent return reversal of previous extreme performers is unlikely to be caused by either lead-lag effects or inventory imbalances, the most likely explanation being market overreaction. A market or trading based explanation is reinforced by the finding that these return reversals are asymmetric, being less significant after bad news. Further, we find that the lower transacting stocks exhibit the stronger return reversals, in direct contrast to both the existing US evidence and the implication that liquidity effects can explain the return reversals. JEL Classification: G10, G11, G12

Multi-echelon inventory control in divergent systems with shipping frequencies

We consider inventory control in a two-echelon divergent network, consisting of a central depot and multiple (non-identical) local warehouses. Past research has shown that ( R, S) order-up-to control rules for this system type can easily be obtained using a decomposition approach, where the derivation of the order-up-to level S is separated from the derivation of the rationing parameters. We show that a similar approach can be used to solve models including different shipment frequencies at the two levels. For example, a central depot receives replenishment orders every four weeks, while replenishment orders to several local warehouses are shipped weekly. In this way, inventory imbalance can be reduced compared to immediate shipment to the local warehouses after goods receipt by the central depot. A method is presented to determine the control parameters such that target fill rates for the local warehouses are obtained. Extensive experimentation with the model shows that the stock reduction is relatively small for identical holding costs throughout the network. Then the largest reduction (6.6%) is obtained in case of frequent resupply in the downstream part of the network. Different shipment frequencies appear to be more useful if central holding costs are (considerably) less than local holding costs.

Anatomy of a Market Failure: NYSE Trading Suspensions (1974-1988)

A cross-sectional analysis of all trading suspensions that occurred during the period 1974-1988 in the New York Stock Exchange reveals that though the desire to maintain price continuity remains an important motivation to suspend trade, inventory imbalance fears are pronounced for large firms. Adverse selection concerns afflict all news related suspensions irrespective of firm size. Further, we find substitutability amongst the various dimensions of liquidity: while large cap stocks have lower bid-ask spreads, they halt more often. A time-series analysis shows that the resiliency of the exchange -- its ability to absorb severe volatility shocks -- has improved in this period.